A few months ago Guillermo Gortázar told us that the bailout of Cuba has cost Spanish taxpayers 1.5 billion euros and a deferral of a similar amount by 18 years. The cancellation of the regime’s debt by some countries, unfortunately, has not helped to promote freedom and democracy, but to perpetuate the dictatorship. Continue reading Do Not Forget Cuba
Why does the promise of raising taxes to the rich always end with higher taxes to the middle class? In this short video, we explain it.
The interventionists promise large funds and expenditure plans for all kinds of projects that they intend to finance by “raising taxes on the rich”.
Those expenses, of course, are true, real ones. However, their revenue estimates are simply overoptimistic. Under Obama, the average federal tax rate paid by the top 1% of households went gone up more than 6 percentage points to an estimated 33.8%, according to the Tax Policy Center.
What ensued was: Debt and deficits still ballooned and the middle class suffered even more tax increases.
How does this happen?
First: Spend more. The historical average of over-spending on budget is 10% in the past eight years. Federal outlays far exceeded the government plans and estimates, raising the debt ceiling in three occasions. This has been an issue in almost every administration of the past twenty years. From 2008 to 2009, federal spending jumped 17.9 percent, reaching $3.5 trillion, going to $3.9 trillion in 2016.
Second: Revenue estimates are not even remotely enough to cover the rise in spending. Tax revenues did increase in absolute and relative to GDP terms. However, spending increased even more.
When its recovery plan was announced, the White House predicted an average growth in the economy of 4-4.5 percent, and the budget deficit would shrink to 3.5 percent of GDP . Public debt ballooned from 48% to 75% of GDP and average annual deficit was 5.2%. Total receipts, despite the recovery, low unemployment and a massive stimulus, fell short of estimates by almost $110 billion in 2016 alone.
After $1.5 trillion in new taxes, debt increased by $10 trillion. In 2013, increasing the employee payroll tax from 4.2% to 6.2% made an average worker earning $50k a year pay $1k more in taxes.
We must remember that the average error in estimates of new tax revenue in the OECD has ranged between 20% and 50%.
At the end of the day, it is plan and simple maths. The estimates of revenue increases are made by the same government officials that benefit from increasing federal outlays because it increases their power, and when those revenues fall short of magic and unachievable expectations, you pay. They win.
You cannot fund trillions of dollars by raising taxes on a few thousand, as rich as they might be. The promises of billions in spending funded by the rich becomes the reality of more debt and higher taxes to everyone.
Very real expenditures, very real debt increases, and very idealistic optimistic tax receipt estimates. An equation that always ends in “raising taxes to all”.
The next time you read that billions of new public spending will be financed by the wealthy, remember it will be you who pays.
Daniel Lacalle is Chief Economist at Tressis, SV a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP)
Further read:
https://faculty.chicagobooth.edu/austan.goolsbee/research/taxrich.pdf
http://assets.press.princeton.edu/chapters/s10674.pdf
https://pdfs.semanticscholar.org/0589/69ee69e57ffd296b76dbf4504bb8766a4197.pdf
http://www.aei.org/publication/should-the-top-marginal-income-tax-rate-be-73-percent/
“And I will pray to a big god, as I kneel in the big church” Peter Gabriel
Imagine for a moment that you are a British citizen with doubts about Brexit. You turn on the television and listen to the President of the European Commission, Jean-Claude Juncker, state the following:
– That the 27 countries of the Union should adopt the euro and be in Schengen by 2019.
– That “we are not naive defenders of free trade”.
– That Europe needs a European superminister of Economy and Finance who is also Vice-President of the Commission and President of the Eurogroup.
– That a European Monetary Fund should be created
Probably, at that moment, many doubts will dissipate. Unfortunately, for those who would like the UK to remain in the European Union, in the opposite direction of their wishes. You would probably think “thank God we are out”.
Juncker’s speech on September the 13th did not seek to find elements for an agreement with the United Kingdom, but to strengthen the current model of the Eurozone at all costs. It was presented as an opportunity to remind us all of his real project for the European Union, clearly based on the French interventionist economic and financial “dirigisme”, and very far from the UK, Finnish, Irish or Dutch open model of economic freedom.
That is the big problem. The message of “more Europe” is always oriented towards “more interventionism” .
A few weeks ago we questioned in this column the triumphant message of the European Commission affirming that “Europe has left the crisis thanks to the decisive action of the European Union“. With Juncker’s speech we can say that the slightest hint of taking advantage of Brexit to improve in freedom, flexibility and dynamism disappears.
Instead of reflecting on the reason why the hyper-regulated and massively intervened Europe has taken more than three times as other countries to emerge from the crisis, we are faced with the classic response of bureaucratic power.
According to Juncker and others’ in Brussels, one could think that if Europe grows less, creates less employment and comes out of the crisis later, it is not because of excessive bureaucracy, but because there is not enough.
The EU runs the risk of falling into the glorification of centralized planning first and foremost, absolute uniformity, and obsolete interventionism that has nothing to do with the plural, free and diverse United States of America and which shows too many coincidences with the Soviet Union dependent on the politburo.
Juncker’s call for efficiency can be interpreted as a breath of fresh air, but it contrasts with reality.
According to the Intelligent Regulation Forum and with the official data of the European Union for 2015, the member countries are subject to more than 40,000 rules by the mere fact of being part of the EU institutions . In total, including rules, directives, sectoral and industrial specifications and jurisprudence, they estimate that there are some 135,000 obligatory rules.
A European Monetary Fund is clearly a subterfuge to give free rein to the uncontrolled financing of white elephants to greater glory of governments and rent-seeking sectors. Faced with the evident failure of the already forgotten “Juncker plan”, no one seems to consider the failure of constant wastefulness in industrial and stimulus plans that have led the European Union to overcapacity of more than 20% and huge financial holes. According to Transparency International, in the European Union, between 10% and up to 20% of all public contracts are lost in excess costs and 5% of the EU’s annual budget is not accounted.
No one thought about it before… A mega Monetary Fund that finances megalomaniac projects with no real economic return with unlimited funds paid with taxpayers’ money, and a superminister that joins to the other superministers and the national and supranational superstructures. A strategy that has worked perfectly… never .
The fundamental problem of these proposals is that they push forward an incorrect model, which could be improved by learning from those that this “more Europe” message intends to ostracize, be it the British, Finnish, Irish or Dutch.
That none of Juncker’s advisers and assistants have questioned the convenience of including the following phrases is revealing: “We are not naive advocates of free trade”, “We propose a new community framework for the control of investments”.
But no. It is not a question of correcting the evident errors of interventionism. It is not a serious debate on why Europe does not have a Google, an Amazon or an Apple while maintaining dinosaur conglomerates. It is not about improving in openness so that the investment comes to Europe. It is about imposing “dirigisme” above all, whether it works or not. It is about creating a sanctuary of adoration of bureaucracy at all costs, and covering it with unnecessary expenses and burning the printing machine when the evidence of stagnation is imposed after minimal rebounds.
The worst thing is not that the British citizen thinks “it’s a good thing we’re out.” The worst thing is to ignore a part of the European Union that does not want a photocopy of French interventionism.
When Brussels equates more Europe to more interventionism, the EU runs the risk of being less. A lot less.
Daniel Lacalle is Chief Economist at Tressis, SV a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).
In this video, we discuss a few issues, including:
Daniel Lacalle is Chief Economist at Tressis, SV a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).