Dan Mitchell article “George H.W. Bush’s Ill-Fated Luxury Tax” also throws NY GUV under bus!

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George H.W. Bush’s Ill-Fated Luxury Tax

When politicians target “the rich” with class-warfare schemes like wealth taxes, it’s often ordinary people that bear the costs.

For a painful example of how this works in the real world, check out the first 42 seconds of this video.

From an economic perspective, this is a story about secondary or indirect effects. Or, as noted in the video, there are unintended consequences.

In most cases, the fundamental problem with class-warfare taxes is that they penalize saving and investment with double taxation. This is bad for workers because there’s a strong link between the level of capital (i.e., machines, tools, technology) and productivity.

And since there’s also a strong link between productivity and pay, this explains why ordinary people generally don’t enjoy much opportunity in societies with spite-driven tax laws.

Now let’s consider the case of the luxury tax, which was part of President George H.W. Bush‘s disastrous 1990 tax increase.

Rather than being a broad tax on saving and investment, it was an excise tax on a group of products (the levy on expensive boats got most of the attention).

Let’s see what actually happened, and we’ll start with some excerpts from this 1993 column in the Washington Post by James Glassman.

Rich people aren’t happy about paying this extra money. Even if they can afford it, they think it’s unfair. And in some cases, they’re refusing to pay it — simply by refusing to buy new boats and planes. Of course, rich people don’t have to buy a new 90-foot Broward… So the federal government doesn’t get the tax money — and, worse, Broward doesn’t sell its yacht and various boat builders get put out of work.As a result, in its first year and a half, the yacht tax raised a pathetic $12,655,000 for the Treasury. …Meanwhile, the tax has contributed to the general devastation of the American boating industry — as well as the jewelers, furriers and private-plane manufacturers that were also targets of the excise tax… What went wrong with the luxury tax was that, in trying to go after the rich guys’ toys, Congress put the toymakers out of business. The rich guys, meanwhile, bought other toys (including foreign-made ones) not covered by the tax; or they bought used toys and refurbished them; or they simply saved the money, waiting to spend it another day.

The government still collected some money from the tax on the “toys,” but it’s also important to understand that it lost money when the “toymakers” lost their jobs.

So there was a Laffer Curve-type effect.

The great, late, Walter Williams opined on this issue more recently. Here are segments of his 2011 column.

Let’s look at what happened when…George H.W. Bush signed the Omnibus Budget Reconciliation Act of 1990 and broke his “read my lips” vow not to agree to new taxes. When Congress imposed a 10 percent luxury tax on yachts, private airplanes and expensive automobiles, Sen. Ted Kennedy and then-Senate Majority Leader George Mitchell crowed publicly about how the rich would finally be paying their fair share of taxes. What actually happened…In the first year, one-third of U.S. yacht-building companies stopped production, and according to a report by the congressional Joint Economic Committee, the industry lost 7,600 jobs. When it was over, 25,000 workers had lost their jobs building yachts, and 75,000 more jobs were lost in companies that supplied yacht parts and material. …Jobs shifted to companies in Europe and the Bahamas.

Walter explicitly explains why the government lost revenue.

The U.S. Treasury collected zero revenue from the sales driven overseas. …Congress told us that the luxury tax on boats, aircraft and jewelry would raise $31 million in revenue a year. Instead, …job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. The net effect of the luxury tax was a loss of $7.6 million in fiscal 1991. …Why did congressional dreams of greater revenues turn into a nightmare? Kennedy, Mitchell and their congressional colleagues simply assumed that the rich would act the same after the imposition of the luxury tax as they did before and that the only difference would be more money in the government’s coffers. Like most politicians then and now, they had what economists call a zero-elasticity vision of the world, a fancy way of saying they believed that people do not respond to price changes. People always respond to price changes. The only debatable issue is how much and over what period.

And Walter’s analysis also applies to Joe Biden’s proposed tax increases.

It’s quite possible that the government will collect more money if Biden’s fiscal plan is enacted, but not as much as politicians think. More important, there will be lots of collateral economic damage.

Call me crazy, but I don’t want ordinary people to lose jobs simply because greedy politicians want more money so they can try to buy more votes.

P.S. If it’s any consolation, politicians from other nations can be equally foolish and short-sighted. Both France and Italy suffered when governments went after yachts.

P.P.S. You won’t be surprised to learn that pro-tax former Senator John Kerry avoided taxes on his yacht.

Milton Friedman – Is tax reform possible?

Cutting the U.S.’s Corporate Tax Rate

There are several features of President-Elect Trump’s tax plan that are worthy of praise, including death tax repeal, expensing, and lower marginal tax rates on households.

But the policy that probably deserves the most attention is Trump’s embrace of a 15 percent tax rate for business.

What makes this policy so attractive – and vitally important – is that the rest of the world has been in a race to reduce corporate tax burdens.

Ironically, the U.S. helped start the race by cutting the corporate tax rate as part of the 1986 Tax Reform Act. But ever since then, policy in America has stagnated while other developed nations are engaged in a virtuous contest to become more competitive.

And that race continues every day.

Most impressively, as reported by the Financial Times, Hungary will cut its corporate tax rate from 19 percent to 9 percent.

Hungary’s government is to cut its corporate tax rate to the lowest level in the EU in a sign of increasingly competitive tax practices among countries seeking to lure foreign direct investment. Prime Minister Viktor Orban said a new 9 per cent corporate tax rate would be introduced in 2017, significantly lower than Ireland’s 12.5 per cent. …The government said the new single band would apply to all businesses. “Corporation tax will be lowered to single digits next year: a rate of 9 per cent will apply equally to small and medium-sized enterprises and large corporations,” a statement said. …Gabor Bekes, senior research fellow at Hungary’s Institute of Economics…said the measure would likely provoke complaints of unfair tax competition from western capitals.

Needless to say, complaints from Paris, Rome, and Berlin would be a sign that Hungary is doing the right thing.

Croatia also is moving policy in the right direction, albeit in a less aggressive fashion.

Corporate income tax will…be cut from 20 to 18 per cent for large companies and from 20 to 12 per cent for small and mid-level companies whose income is no higher than 400,000 euros annually.

Though the Croatian government also plans to lower tax rates on households.

Before the reform, people with salaries between 300 and 1,750 euros a month were taxed at 25 per cent, while now everyone earning up to 2,325 euros a month will be taxed at a 24 per cent rate. People earning more than 2,325 euros a month will have a 36 per cent tax rate, replacing a 40 per cent tax rate for anyone earning over 1,750 euros a month.

But let’s keep the focus on business taxation.

Our friends on the left don’t like Trump’s plan for a corporate tax cut, but here are there things they should know.

  1. A lower corporate tax rate won’t necessarily reduce corporate tax revenue, particularly over time as there’s more investment and job creation.
  2. A lower corporate tax rate will dramatically – if not completely – eliminate any incentive for American companies to engage in inversions.
  3. A lower corporate tax rate will boost workers wages by increasing the nation’s capital stock and thus improving productivity.

If you want more information, here’s my primer on corporate taxation. You can also watch this video.

Or, to make matters simple, we can just copy Estonia, which has the world’s best system according to the Tax Foundation.

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