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Archive for the ‘Economic Growth’ Category

George Will: Eliminate Estate Tax for Economic Recovery

Posted by Brian Garst on August 12, 2011

In the midst of explaining how to fix the economy in an interview with PBS’ Charlie Rose, George Will had this to say about the death tax:

“I would eliminate the death tax. I don’t know why death is a taxable event in this country. No more estate taxes. Eliminate — go back to the classic — no taxation without respiration, that’s right. Go back to the classic Bill Bradley/Ronald Reagan tax reform of 1986. Lower the rates by eliminating loopholes and exceptions.”


Posted in Death Tax, Economic Growth | Comments Off on George Will: Eliminate Estate Tax for Economic Recovery

Candidates Talk Taxes in Republican Debate

Posted by Brian Garst on June 14, 2011

There were a couple of mentions of double taxation in the recent CNN sponsored Republican primary debate in New Hampshire.

Herman Cain took the most definitive stance, pledging to eliminate the capital gains tax:

CAIN: The thing we need to do is to get this economy boosted. This economy is stalled. It’s like a train on the tracks with no engine. And the administration has simply been putting all of this money in the caboose.

We need an engine called the private sector. That means lower taxes, lower the capital gains tax rate to zero, suspend taxes on repatriated profits, then make them permanent. Uncertainty is killing this economy. This is the only way we’re going to get this economy moving, and that’s to put the right fuel in the engine, which is the private sector.

Rick Santorum also mentioned cutting the capital gains tax, but took a more modest position:

We need to cut the capital gains tax in half which others have proposed but for manufacturers we need to give a five-year window where we cut it to zero.

Posted in Capital Gains Tax, Economic Growth | Tagged: , , | 1 Comment »

Small Business Owner Cites Death Tax Burden

Posted by Brian Garst on May 22, 2011

The Oregon legislature has been debating whether to raise its state death tax. In response, small business owner Peter Nelson explains how the death tax affects their ability to increase employment:

My grandfather started Marc Nelson Oil Products as a one-man shop. Today we employ 30 in the Salem area. We’d like to employ more.

…Despite what some may think, family businesses are not awash in cash; our resources are tied up in equipment, salaries, facilities and the like. The more money diverted to estate tax planning and to estate tax payments when I die, the less resources for expansion and hiring today and in the future.

Posted in Death Tax, Economic Growth | 1 Comment »

Uncertainty and Growth

Posted by Brian Garst on December 15, 2010

Matt Mitchell at the Mercatus Center blog notes that the problem of tax uncertainty is not only caused by temporary tax provisions, but also from unsustainable spending trajectories. At some point the current federal spending path will force politicians either to reduce expenditures or raise taxes, which produces additional uncertainty even in the absence of temporary tax provisions.

Posted in Economic Growth, Government Spending | Tagged: | Comments Off on Uncertainty and Growth

The Good, the Bad, and the Ugly of the Tax Deal

Posted by Dan Mitchell on December 7, 2010

Compared to ideal policy, the deal announced last night between congressional Republicans and President Obama is terrible.

Compared to what I expected to happen, the deal announced last night is pretty good.

In other words, grading this package depends on your benchmark. This is why reaction has been all over the map, featuring dour assessments from people like Pejman Yousefzadeh and cheerful analysis from folks such as Jennifer Rubin.

With apologies to Clint Eastwood, let’s review the good, the bad, and the ugly.

The Good

The good parts of the agreement is the avoidance of bad things, sort of the political version of the Hippocratic oath – do no harm. Tax rates next year are not going to increase. The main provisions of the 2001 and 2003 tax acts are extended for two years – including the lower tax rates on dividends and capital gains. This is good news for investors, entrepreneurs, small business owners, and other “rich” taxpayers who were targeted by Obama. They get a reprieve before there is a risk of higher tax rates. This probably won’t have a positive effect on economic performance since current policy will continue, but at least it delays anti-growth policy for two years.

On a lesser note, Obama’s gimmicky and ineffective make-work-pay credit, which was part of the so-called stimulus, will be replaced by a 2-percentage point reduction in the payroll tax. Tax credits generally do not result in lower marginal tax rates on productive behavior, so there is no pro-growth impact.  A lower payroll tax rate, by contrast, improves incentives to work. But don’t expect much positive effect on the economy since the lower rate only lasts for one year. People rarely make permanent decisions on creating jobs and expanding output on the basis of one-year tax breaks.

Another bit of good news is that the death tax will be 35 percent for two years, rather than 55 percent, as would have happened without an agreement, or 45 percent, which is what I thought was going to happen. Last but not least, there is a one-year provision allowing businesses to ”expense” new investment rather than have it taxed, which perversely happens to some degree under current law.

The Bad

The burden of government spending is going to increase. Unemployment benefits are extended for 13 months. And there is no effort to reduce spending elsewhere to “pay for” this new budgetary burden. A rising burden of federal spending is America’s main fiscal problem, and this agreement exacerbates that challenge.

But the fiscal cost is probably trivial compared to the human cost. Academic research is quite thorough on this issue, and it shows that paying people to remain out of work has a significantly negative impact on employment rates. This means many people will remain trapped in joblessness, with potentially horrible long-term consequences on their work histories and habits.

The agreement reinstates a death tax. For all of this year, there has not been a punitive and immoral tax imposed on people simply because they die. So even though I listed the 35 percent death tax in the deal in the “good news” section of this analysis because it could have been worse, it also belongs in the “bad news” section because there is no justification for this class-warfare levy.

The Ugly

As happens so often when politicians make decisions, the deal includes all sorts of special-interest provisions. There are various special provisions for politcally powerful constituencies. As a long-time fan of a simple and non-corrupt flat tax, it is painful for me to see this kind of deal.

Moreover, the temporary nature of the package is disappointing. There will be very little economic boost from this deal. As mentioned above, people generally don’t increase output in response to short-term provisions. I worry that this will undermine the case for lower tax rates since observers may conclude that they don’t have much positive effect.

To conclude, I’m not sure if this is good, bad, or ugly, but we get to do this all over again in 2012.

Posted in Capital Gains Tax, Death Tax, Dividends Tax, Economic Growth, Government Spending, Legislation | Tagged: , , , , , , | Comments Off on The Good, the Bad, and the Ugly of the Tax Deal

Untangling Sherrod’s Keynesian Nonsense

Posted by Brian Garst on December 1, 2010

Nancy Pelosi was rightly mocked for her nonsensical assertion that subsidizing unemployment is the best way to stimulate the economy.  Unfortunately, as we pointed out at the time, such claims reflect nothing more than standard Keynesian economics as understood by so many politicians.  Now Sherrod Brown’s saying the same thing:

“Congressman Cantor (R-VA) either failed English class or failed logic class or failed history class because these tax cuts for the rich that Bush did twice, in ’01 and ’03, resulted in very little economic growth. We saw only one million jobs created in the Bush years, 22 million created in the Clinton years when we reached a balanced budget with a fairer tax system,” Sen. Sherrod Brown (D-Ohio) said on MSNBC.

“There is no real history illustrating that these tax cuts for the rich result in jobs. It’s extending unemployment benefits that creates economic activity that creates jobs, not giving a millionaire an extra ten or twenty or $30,000 in tax cuts that they likely won’t spend,” Brown said.

It’s easy to scoff once again at the silly notion that subsidizing unemployment “creates economic activity that creates jobs.” There are reasonable humanitarian arguments for some form of safety-net, sure, but there’s no pro-growth argument for extended unemployment benefits. But there’s a lot still to untangle here.

First, the  Bush era tax cuts were an amalgamation of a number of different approaches, including both a lot of gimmick handouts and a few good supply-side cuts. We know the gimmicky rebates in 2001 didn’t do anything, just as they didn’t when both Bush and Obama tried them again in 2008 and 2009, but that’s also the type of policy Sherrod implies he would support when he articulates, by scoffing at the “tax cuts that they likely won’t spend,” the common misconception that the benefit of low tax rates comes in the form of increased consumer spending (our latest video can explain more fully the fallacy of this Keynesian approach).

The 2003 cuts, on the other hand, contained some better policies, such as lower marginal tax rates on income and reductions in the capitals gains tax. The benefits from these lower rates comes not from increased consumer spending, but because they reduce barriers on saving and investing.

Due to the nature of their earnings, taxes on the so-called rich are more often than not taxes on capital, which slows economic growth because capital is the lifeblood of a capitalist economy. The rich, moreover, can more easily determine the manner and timing of their income, which makes them more responsive to marginal tax rates than other brackets. High tax rates on anyone is bad, but there are few faster ways to drown an economy than trying to “soak the rich.” This is why it is imperative that we not raise those rates now, or ever.

Posted in Capital Gains Tax, Economic Growth | Tagged: | Comments Off on Untangling Sherrod’s Keynesian Nonsense

It’s Who Produces, Not Who Spends, That Matters

Posted by Heather Edwards on November 1, 2010

Economists Alex Brill and Chad Hill illustrate in a recent Forbes article that looming tax increases, if allowed to go into effect January 1st, will essentially “bite the hand that feeds long-run economic growth” by disparaging savings, investment and the taxpayers that account for the majority of that investment.

The current administration is promoting the troubling implication that the rich will not miss what they are taxed on because they are less likely to spend that money; therefore giving them a tax break would do very little to boost the economy.  Brill and Hill correctly argue that this logic presupposes that ever-increasing spending of borrowed funds is the answer to the country’s economic woes, and simultaneously neglects the importance of saving by encouraging families to spend, spend, spend because the social safety net will rescue them.

Because “future living standards depend in large part on the willingness of the current generation to save for the future,” when Washington de-emphasizes the importance of saving by taxing returns to savings – or promotes policy that disadvantages investment, hiring workers and growing business – long-term growth will not follow.  Our collective savings are the funds used to allow business to access the capital needed to grow.  Slapping higher taxes on the top percentage of earners will deter savings and further slow growth, as much of the savings available for economic growth comes from that top sector of earners (IRS data for 2007 reveals that households that earn above $200,000 receive 47% of taxable interest income, 60% of dividends and 84% of net capital gains).

Ultimately, increased taxing of top earners is not good policy, economically or otherwise.

Posted in Economic Growth, Legislation | Comments Off on It’s Who Produces, Not Who Spends, That Matters

The High Cost of Tax Hikes

Posted by Heather Edwards on October 25, 2010

A recent Heritage Foundation report highlights the impending effects of an Obama Tax hike through an economic model created by the Center for Data Analysis, which estimates the potential economic and fiscal effects of a tax increase on the American economy from 2011 through 2020. This prototype estimates that inflation-adjusted GDP will fall by a total of 1.1 trillion over the projected period; and slower economic growth will result in less job creation, with an increasing number of jobs lost each year (in 2016 alone job losses would top 876,000). The model also predicts that business investment and personal savings will fall considerably each subsequent year, and that significant amounts of lost disposable income and reduced consumer spending will not result in increased government revenue.

The belief that only higher income earners will be affected is badly mistaken. In fact, higher income earners have greater control over creatively reducing their levels of taxable income. Nearly everyone will pay one way or another, whether through lower income or a rise in product costs. Around half of those subject to the tax increase will be small businesses, which in turn will directly and adversely affect job creation. These results are consistent with basic economics: where tax increases raise the price of capital and labor, economic activity will slow down.

Ultimately, a tax increase is misdirected policy, for the fundamental problem does not lie with revenue intake amounts, but rather with Congressional over-spending. As this paper argues, “Congress must come to terms with the need to find a new fiscal balance point through lower spending and fundamental entitlement reform that also supports strong economic growth.”

See here for the full report.

Posted in Economic Growth, Legislation | Comments Off on The High Cost of Tax Hikes

Growth is the Key to Success

Posted by Heather Edwards on October 17, 2010

Dan Henninger was right when he wrote in his recent Wall Street Journal article that there is only one economic policy that has not been tried yet in an effort to pull the American economy out of its tailspin: economic growth.  With impending tax increases about to tighten the lid on pessimistic projections for the near future, he also correctly acknowledged the importance of strong economic growth for a nation, in contrast to the current mediocre growth in the US today, is indisputable among economists, and that it is vital for a nation to “do whatever it takes to get it:”

With it, we win, without it, we lose.  Economist Paul Romer, in an article on economic growth, bluntly explained why:  ‘For a nation, the choices that determine whether income doubles with every generation, or instead with every other generation, dwarf all other economic policy concerns.’

I agree with Henninger: Americans are best at competing, working and innovating.  If they are supported by tax policies that enable them to freely do so, strong growth will again rebound.

Posted in Economic Growth | Comments Off on Growth is the Key to Success

Eastern Europe Tax Lesson

Posted by Heather Edwards on October 9, 2010

In case there is any question left in your mind as to how the American economy will be affected by higher taxes, take a look at how Eastern Europeans are responding to the same in their neck of the woods:

Thousands of Romanian companies are moving their business to neighboring Bulgaria, the Bulgarian National Radio, BNR, informs Saturday.

The reasons cited are the spending cuts and austerity measures imposed in Romania, lower taxes and better conditions for the business in Bulgaria.

In Bulgaria revenue and profit taxes are 10% compared to 16% in Romania. The Value Added Tax (VAT) is also lower…

In addition, it is much easier to establish a company in Bulgaria where one needs less than a week and BGN 2 as initial capital.

It is estimated that nearly 2,500 Romanian companies have already moved to Bulgaria. The Bulgarian Danube city of Ruse sees 2 registrations of Romanian businesses per day.

Cultures are undoubtedly different, but human nature and behavior towards one’s interests is virtually the same around the world.

Posted in Economic Growth | Tagged: | Comments Off on Eastern Europe Tax Lesson