Will Wilkinson notes that there is a libertarian argument for Bernie Sanders. I’m not sure I buy the precise point Wilkinson is making. Sanders says he wants to make the United States more like Finland, Sweden, and Denmark. And those countries do indeed rank higher than the United States in the Cato Institute’s Human Freedom Index, compiled by my colleagues Ian Vásquez and Tanja Porčnik. But Sanders wants to emulate those countries in the ways they are less free than the United States (i.e., expanding government transfers), not in the ways they are more free (taxes and regulation). I think this powerful Sanders ad featuring Eric Garner’s daughter Erica is a much better libertarian argument for Sanders.
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Tax and Budget Policy
The Fundamental Fallacy of Redistribution
The idea that government could redistribute income willy-nilly with impunity did not originate with Senator Bernie Sanders. On the contrary, it may have begun with two of the most famous 19th Century economists, David Ricardo and John Stuart Mill. Karl Marx, on the other side, found the idea preposterous, calling it “vulgar socialism.”
Mill wrote, “The laws and conditions of the production of wealth partake of the character of physical truths. There is nothing optional or arbitrary about them.… It is not so with the Distribution of Wealth. That is a matter of human institution only. The things once there, mankind, individually, can do with them as they like.”[1]
Mill’s distinction between production and distribution appears to encourage the view that any sort of government intervention in distribution is utterly harmless – a free lunch. But redistribution aims to take money from people who earned it and give it to those who did not. And that, of course, has adverse effects on the incentives of those who receive the government’s benefits and on taxpayers who finance those benefits.
David Ricardo had earlier made the identical mistake. In his 1936 book The Good Society (p. 196), Walter Lippmann criticized Ricardo as being “not concerned with the increase of wealth, for wealth was increasing and the economists did not need to worry about that.” But Ricardo saw income distribution as an interesting issue of political economy and “set out to ascertain ‘the laws which determine the division of the produce of industry among the classes who concur in its formation.’
Lippmann wisely argued that, “separating the production of wealth from the distribution of wealth” was “almost certainly an error. For the amount of wealth which is available for distribution cannot in fact be separated from the proportions in which it is distributed.… Moreover, the proportion in which wealth is distributed must have an effect on the amount produced.”
The third classical economist to address this issue was Karl Marx. There were many fatal flaws in Marxism, including the whole notion that a society is divided into two armies – workers and capitalists.[2] Late in his career, however, Marx wrote a fascinating 1875 letter to his allies in the German Social Democratic movement criticizing a redistributionist scheme he found unworkable. In this famous “Critique of the Gotha Program,” Marx was highly critical of “vulgar socialism” and considered the whole notion of “fair distribution” to be “obsolete verbal rubbish.” In response to the Gotha’s program claim that society’s production should be equally distributed to all, Marx asked, “To those who do not work as well? … But one man is superior to another physically or mentally and so supplies more labor in the same time, or can labor for a longer time.… This equal right is an unequal right for unequal labor… It is, therefore, a right to inequality…”
New Obama Budget: The Usual Reckless Spending Hikes…and a Big New Tax on American Energy Consumers
We have good news and bad news.
The good news is that President Obama has unveiled his final budget.
The bad news is that it’s a roadmap for an ever-growing burden of government spending. Here are the relevant details.
- The President wants the federal budget to climb by nearly $1.2 trillion over the next five years.
- Annual spending would jump by an average of about $235 billion per year.
- The burden of government spending would rise more than twice as fast as inflation.
- By 2021, federal government outlays will consume 22.4% of GDP, up from 20.4% of economic output in 2014.
I guess the President doesn’t have any interest in complying with Mitchell’s Golden Rule, huh?
![Media Name: murray-budget-3.jpg](/sites/cato.org/files/styles/pubs_2x/public/download-remote-images/danieljmitchell.files.wordpress.com/142427067457/murray-budget-3.jpg?itok=NAZAvBOb)
While all this spending is disturbing (should we really step on the accelerator as we approach the Greek fiscal cliff?), the part of this budget that’s really galling is the enormous tax increase on oil.
As acknowledged in a report by USA Today, this means a big tax hike on ordinary Americans (for what it’s worth, remember that Obama promised never to raise their taxes).
Consumers will likely pay the price for President Obama’s proposed $10 tax per-barrel of oil, an administration official and a prominent analyst said Thursday. Energy companies will simply pass along the cost to consumers, Patrick DeHaan, senior petroleum analyst for GasBuddy.com, which tracks gas prices nationwide, said in an interview with USA TODAY. .…a 15-gallon fill-up would cost at least $2.76 more per day. It would also affect people who use heating oil to warm their homes and diesel to fill their trucks.
Isn’t that wonderful. We’ll pay more to fill our tanks and heat our homes, and we’ll also pay more for everything that has oil as an input.
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President Obama’s FY2017 Budget
President Obama has released his budget for fiscal year 2017. The president’s spending and revenue proposals will be mainly dead on arrival on Capitol Hill, including his $3 trillion in proposed tax hikes.
So it is more interesting to look at the budget baseline, which presents projections assuming no changes in law going forward. Since Obama’s proposals will go nowhere in Congress, the baseline gives us a better picture of what the next president will face when he or she comes into office next year.
Under the baseline, fast-growing spending inflates the deficit from $616 billion this year to $1.4 trillion by 2026. As the deficits accumulate, federal debt held by the public will soar from $14 trillion this year to about $24 trillion by 2026.
If you stacked $24 trillion in $100 bills in a pile, it would stretch 16,000 miles high, or about the height of 150,000 Washington Monuments. Government debt—driven by deficit spending—is by far Washington’s largest monument.
Where is all the spending going? The chart below shows federal outlays divided into four pots, as a share of gross domestic product (GDP) from 1970 through to 2026, with projections under the baseline. The chart reveals that entitlement spending—driven by rapid growth in Social Security and health programs—will increasingly dominate the budget in coming years.
I suspect that entitlement spending will also dominate the next president’s tenure in office as it drives up debt to unprecedented and dangerous levels, although you wouldn’t know that from the campaign trail so far this year.
![Media Name: federal_spending.png](/sites/cato.org/files/styles/pubs_2x/public/wp-content/uploads/federal_spending.png?itok=cL-KoAMD)
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For Cam Newton, Adding Super Tax Insult to Super Bowl Injury
When I give speeches in favor of tax reform, I argue for policies such as the flat tax on the basis of both ethics and economics.
The ethical argument is about the desire for a fair system that neither punishes people for being productive nor rewards them for being politically powerful. As is etched above the entrance to the Supreme Court, the law should treat everyone equally.
The economic argument is about lowering tax rates, eliminating double taxation, and getting rid of distorting tax preferences.
Today, let’s focus on the importance of low tax rates and Cam Newton of the Carolina Panthers is going to be our poster child. But before we get to his story, let’s look at why it’s important to have a low marginal tax rate, which is the rate that applies when people earn more income.
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Financial Transaction Tax Would Be Damaging
An editorial in today’s New York Times calls for a financial transactions tax – a tenths of a percent charge on the market value of every trade of a stock, bond, or derivative. My Working Papers column two years ago described the pitfalls of such a tax. While tax rates in the range of tenths of a percent sound small they would have large effects on stock values. Bid-ask spreads are now 1 cent for large cap stocks. A 0.10 percent tax would add 5 cents to the spread for a $50 stock.
The alleged purpose of such a tax is to reduce the arms race among High Frequency Traders who exploit differences in the timing of bids and offers across exchanges at the level of thousandths of a second to engage in price arbitrage. In the Fall 2015 issue I review a paper that demonstrates that this arms race is the result of stock exchanges’ use of “continuous-limit-order-book” design (that is, orders are taken continuously and placed when the asset reaches the order’s stipulated price). The authors use actual trading data to show that the prices of two securities that track the S&P 500 are perfectly correlated at the level of hour and minute, but at the 10 and 1 millisecond level, the correlation breaks down to provide for mechanical arbitrage opportunities even in a perfectly symmetrical information environment. In a “frequent batch” auction design (where trades are executed, by auction, at stipulated times that can be as little as a fraction of a second apart), the advantage of incremental speed improvements disappears. In order to end the arbitrage “arms race,” the authors propose that exchanges switch to batch auctions conducted every tenth of a second. No need for a tax.
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Tax Rates, Tax Reform and Tax Revenues: Part One
![Top Tax Rates and Revenues as % of GDP](/sites/cato.org/files/styles/pubs_2x/public/wp-content/uploads/income_tax_rates_and_revenues_cropped.jpg?itok=72bypIOa)
Among Democrats seeking their party’s nomination, all candidates have proposed raising the highest tax rates to a least 43.6% (Clinton) or 45% (O’Malley). Sanders famously admired Ike’s top tax rates of 91–92% from 1951 to 1963, but later suggested he’d settle for keeping top brackets of 43, 48 and 52% (including capital gains) while raising all the lower rates by 2.2%. Clinton and O’Malley assert or assume that raising only tax rates on the highest incomes would raise vast sums, enough to finance their many proposed new spending plans for various grants and benefits.
Leading Republican candidates, by contrast, would at least roll-back the highest tax rate to 35% (Rubio), 28% (Bush, Kasich & Christie) or 25% (Trump). Senators Cruz and Paul would go further by replacing both payroll and corporate taxes with a 15–16% value-added tax (on payrolls and profits) while keeping a 10–15% flat tax on income. Huckabee hopes to replace income and payroll taxes with a ~30% federal tax on all retail sales. Carson and Santorum suggest a flat tax of 14.9% or 20% respectively.
Let’s put aside the VAT and lower corporate tax rates for now, to focus on individual income tax rates.
As the graph shows, the U.S. has had considerable experience with top tax rates as high as 91–92%, as low as 28%, and everything in between.
The individual income tax averaged 7.7% of GDP since 1946.