I
A Prosperity Contest: The United States vs. Europe
Many people are stunned by the data I shared early last year showing that ordinary people in the United States tend to be much richer than their peers in advanced European nations.
Here’s some more evidence, courtesy of the Manhattan Institute’s Chris Pope.
As you can see, the poorest people in America are about equal to the poorest people in Germany, France, Canada, and the United Kingdom, but Americans are ahead of their peers when looking at the top 90 percent of the population.
For the top 70 percent, Americans are comfortably ahead.
But not everybody agrees.
Here’s a tweet from John Burn-Murdoch of the U.K.-based Financial Times. He has a very negative portrayal of the United States (and the United Kingdom).
The tweet from Burn-Murdoch includes a link to an article he wrote.
Here are some excerpts.
…one good way to evaluate which countries are better places to live than others is to ask: is life good for everyone there, or is it only good for rich people? …If you’re a proud Brit or American, you may want to look away now. …Norway is a good place to live, whether you are rich or poor. …The rich in the US are exceptionally rich
— the top 10 per cent have the highest top-decile disposable incomes in the world, 50 per cent above their British counterparts. But the bottom decile struggle by with a standard of living that is worse than the poorest in 14 European countries including Slovenia. …transpose Norway’s inequality gradient on to the US, and the poorest decile of Americans would be a further 40 per cent better off while the top decile would remain richer than the top of almost every other country on the planet. …Until those gradients are made less steep, the UK and US will remain poor societies with pockets of rich people.
The United States is a poor society with some very rich people?!?
Is that possibly true?
As you might expect, that is utter hogwash. Here’s a chart, based on data from the Paris-based (and left-leaning) Organization for Economic Cooperation and Development.
It shows “actual individual consumption” in the OECD’s member nations, and people in the United States are far better off than people in any other nations.
Indeed, they have 50 percent more consumption than the average person in other OECD countries.
All you need to know is that Burn-Murdoch took some data about America’s poorest people and wants to mislead readers into thinking it also applies to the general population.
And he doesn’t even show his calculations. For what it’s worth, his numbers are not very consistent with some other data sources that are publicly accessible.
Professor Noah Smith also debunks the FT‘s report.
…when we look at how Americans in the middle of the distribution are doing, we see that America is not a “poor society” at all — in fact, it’s one of the richest on Earth. …the median American has a higher income than the median resident of almost any other country… Some people argue that because European countries buy health care for their citizens via the government — which is not counted in disposable income — that it’s not fair to use disposable income as the comparison measure here.
But this isn’t right. The U.S. has a relatively low percentage of out-of-pocket health spending — our employers and our government pick up most of the tab. In fact, when we look at “adjusted disposable income”, which includes the value of government services like health care, we find out that the U.S. comes out even more ahead relative to other countries. …someone at around the 18th percentile of income in America in 2019 — a working-class person on the edge of being considered poor — lived in a household making $21,400 a year. That’s about the same as the median income of households in Japan, and about 84% of the median income of households in the UK. In other words, a working-class American on the edge of poverty makes as much as a middle-class person in some rich countries.
I’ll close by noting something else that was misleading in the FT report. Burn-Murdoch compares Norway to the U.S. and U.K., but that nation’s oil wealth makes it very unrepresentative.
Since the report concludes by endorsing more redistribution, it would be more honest and appropriate to compare American living standards to the performance of Europe’s other welfare states.
But Burn-Murdoch did not do that because his already flimsy case would look even weaker.
Also, note that he did not highlight Switzerland. After all, it is richer than Norway, even though it does not enjoy abundant natural resources.
I suspect that’s because Switzerland is a libertarian-oriented nation with a comparatively small welfare state. In other words, it’s a role model for good policy, whereas the reporter seems interested in promoting dirigisme.
P.S. Speaking of libertarians, the Burn-Murcoch story in the Financial Times begins with this passage.
Where would you rather live? A society where the rich are extraordinarily rich and the poor are very poor, or one where the rich are merely very well off but even those on the lowest incomes also enjoy a decent standard of living? For all but the most ardent free-market libertarians, the answer would be the latter.
At the risk of stating the obvious, libertarians want a society with the smallest-possible government. Limiting coercion (the non-aggression principle) is the main motive.
Libertarians will view the resulting distribution of income as just, but they also will point out that freer societies do a much better job of generating broadly shared prosperity than government-dominated societies.
The bottom line is that Burn-Murdoch is either extraordinarily ignorant about libertarianism or he suffers from Nancy MacLean levels of bad faith and dishonesty.
Evidence for Lower Corporate Tax Rates, Part III
To begin Part III of this series (here’s Part I and Part II), let’s dig into the archives for this video I narrated back in 2007.
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At the risk of patting myself on the back, all of the points hold up very well. Indeed, the past 15 years have produced more evidence that my main arguments were correct.
Lower corporate rates reduce double taxation- Lower corporate rates reduce taxes on people
- Lower corporate rates boost worker income
- Lower corporate rates boost competitiveness
- Lower corporate rates generate revenue feedback
The good news is that all these arguments helped produce a tax bill that dropped America’s federal corporate tax rate by 14 percentage points, from 35 percent to 21 percent.
The bad news is that Biden and most Democrats in Congress want to raise the corporate rate.
In a column for CapX, Professor Tyler Goodspeed explains why higher corporate tax rates are a bad idea. He’s writing about what’s happening in the United Kingdom, but his arguments equally apply in the United States.
…the more you tax something, the less of it you get. …plans to raise Corporation Tax and end relief on new plant and machinery will result in less business investment – and steep costs for households. …Treasury’s current plans to raise the corporate income tax rate to 25% and end a temporary 130% ‘super-deduction’ for new investment in qualifying plant and machinery
would lower UK investment by nearly 8%, and reduce the size of the UK economy by more than 2%, compared to making the current rules permanent. …because the economic costs of corporate taxation are ultimately borne both by shareholders and workers, raising the rate to 25% would permanently lower average household wages by £2,500. …the macroeconomic effects of raising the Corporation Tax rate to 25% would alone offset 40% of the static revenue gain over a 10-year period, and as much as 90% over the long run.
To bolster his argument for good policy on that side of the Atlantic Ocean, he then explains that America’s lower corporate tax rate has been a big success.
Critics of corporate tax reform should look to the recent experience of the United States… At the time, I predicted that these changes would raise business investment in new plant and equipment by 9%, and raise average household earnings by $4,000 in real, inflation-adjusted terms. …By the end of 2019, investment had risen to 9.4% above its pre-2017 level. Investment by corporate businesses specifically was up even more, rising to 14.2% above its pre-2017 trend in real, inflation-adjusted terms. Meanwhile, in 2018 and 2019 real median household income in the United States rose by $5,000 – a bigger increase in just two years than in the entire 20 preceding years combined. …What about corporate income tax revenues? …corporate tax revenue as a share of the US economy was substantially higher than projected, at 1.7% versus 1.4%.
If you want more evidence about what happened to corporate tax revenue in America after the Trump tax reform, click here.
Another victory for the Laffer Curve.
Not that we should be surprised. Even pro-tax bureaucracies such as the International Monetary Fund and Organization for Economic Cooperation and Development have found that lower corporate rates produce substantial revenue feedback.
So let’s hope neither the United States nor the United Kingdom make the mistake of undoing progress.
P.S. The specter of a higher corporate tax in the United Kingdom is especially bizarre. Voters chose Brexit in part to give the nation a chance to break free of the European Union’s dirigiste approach. But instead of adopting pro-growth policies (the Singapore-on-Thames approach), former Prime Minister Boris Johnson opted to increase the burden of taxes and spending. Hopefully the Conservative Party will return to Thatcherism with a new Prime Minister (and hopefully American Republicans will return to Reaganism!).
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Evidence for Lower Corporate Tax Rates, Part I
Here is the argument why corporate tax rates should be as low as possible.
High corporate tax rates discourage investment.- Less investment reduces worker productivity.
- Lower rates of productivity result in lower wages.
In an ideal world, there would be no corporate income tax (or any income tax).
But I’ll gladly accept any movement in the right direction, which is why the reduction in the corporate tax rate was the crown jewel of Trump’s 2017 tax plan.
The bad news is that Biden wants to undo much of that progress.
Today, let’s look at some new academic evidence on the issue. A new study from the National Bureau of Economic Research, a
We use…post-WWII U.S. data on output, taxes, productivity and R&D spending to estimate the dynamic effects of income tax changes…and focus on personal and corporate income tax changes separately. …In Figure 1, we present our first set of main results. The figure contains two columns. On the left, we show the IRFs to a reduction in the average corporate tax rate. On the right, we show the results for a reduction in the average personal tax rate. …The first row in Figure 1 reveals that, following a shock to corporate and personal income taxes,
the average tax rates decline temporarily. …The second row in Figure 1 shows the impulse response functions for the percentage response of real GDP. … Looking at the first column it is clear that, despite the transitory nature of the corporate tax reduction, there are very persistent effects on real GDP, whose short-run increase of 0.5% persists throughout the ten year period shown in the figure. In other words, the corporate income tax cut has disappeared after 5 years, but the effect on the level of economic activity is still sizable and significant after 8 years. …A similar picture emerges for productivity, as shown in the third row of Figure 1. Both tax rate cuts boost productivity on impact, with the size of the initial response to a personal income tax cut being much larger than for a cut to corporate taxes. On the other hand, the effects of corporate tax cuts grow over time and remain significant even after 10 years.
Here’s the aforementioned Figure 1 from their research.
I’ll conclude by noting that permanent tax cuts are much better than temporary tax cuts.
But if taxes are being cut, regardless of duration, the goal should be to get the most bang for the buck. And there’s plenty of evidence (from the United States, Australia, Canada, Germany, and the United Kingdom) that lowering corporate tax rates is a smart place to start.
P.S. It’s unfortunate that Biden wants a higher corporate tax burden in the United States. It’s even more disturbing that he wants a global tax cartel so the entire world has to follow in his footsteps. But he apparently does not understand the topic.
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control.
Concerning the French overspending problem Dan Mitchell states, “There are obvious lessons from Europe for the United States. If politicians don’t reform entitlement programs, we’re doomed to have our own fiscal crisis at some point in the not-too-distant future.”
This is very true. President Obama has overspent so much that our national debt will double under him and it will ruin our future. WHO WILL WE SEND OUR BILL TO? GERMANY WILL NOT PAY IT.
Some French Economic Humor
May 11, 2012 by Dan Mitchell
Having written several times about crazy French statism, you will understand why I like this cartoon.
Though, to be fair, France hasn’t gotten to the point where it’s being bailed out (it’s probably just a matter of time).
If you want some good analysis of the situation in Europe, Veronique de Rugy of the Mercatus Center hits the nail on the head in her column in today’s Washington Examiner.
France has yet to cut spending. In fact, to the extent that the French are frustrated with “budget cuts,” it’s only because the increase in future spending won’t be as large as they had planned. The same can be said about the United Kingdom. Spain, Italy and Greece have had no choice to cut some spending. However, in the case of these particular countries, the cuts were implemented alongside large tax increases. …This approach to austerity, also known in the United States as the “balanced approach,” has unfortunately proven a recipe for disaster. In a 2009 paper, Harvard University’s Alberto Alesina and Silvia Ardagna looked at 107 attempts to reduce the ratio of debt to gross domestic product over 30 years in countries in the Organisation for Economic Co-operation and Development. They found fiscal adjustments consisting of both tax increases and spending cuts generally failed to stabilize the debt and were also more likely to cause economic contractions. On the other hand, successful austerity packages resulted from making spending cuts without tax increases. They also found this form of austerity is more likely associated with economic expansion rather than with recession. …While the debate over austerity continues, the evidence seems to point to the conclusion that austerity can be successful, if it isn’t modeled after the “balanced approach.” It’s a lesson for the French and other European countries, as well as for American lawmakers who often seem tempted by the lure of closing budget gaps with higher taxes.
This is similar to my recent analysis, and Veronique also is kind enough to cite my analysis of how the Baltic nations have done the right thing and cut spending.
There are obvious lessons from Europe for the United States. If politicians don’t reform entitlement programs, we’re doomed to have our own fiscal crisis at some point in the not-too-distant future.
Only there won’t be anybody there to bail us out.
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It’s clearly an election year scam, one perfectly timed to try to gin up votes for a president whose approval ratings make him toxic on the campaign trail. House Speaker Nancy Pelosi previously suggested Biden’s move would be illegal: “The president can’t do it. That’s not even a discussion,”
The Daily Hatch 