• Tag Archives taxes
  • What High-Tax Europe Really Looks Like

    Promises are mounting in the Democratic Party’s primary debates as contenders try to outbid one another on free health care, free public education, or, in the case of Andrew Yang, just free money. Senator Elizabeth Warren plans to make college free in addition to canceling student debt for millions of people at an estimated cost of $1.25 trillion over 10 years. Senator Bernie Sanders’s “Medicare For All” bill would cost $34 trillion dollars over 10 years.

    This bill alone would almost double the entire US government’s expenditures. Double! Current expenses include interest on the massive national debt, planes, aircraft carriers, tanks and missiles, numerous agencies, NASA and its contributions to the International Space Station, road construction, foreign aid, etc.

    Sanders’s plan would essentially add a second US government on top of the existing one despite the fact that the current government already spends more than it takes in.

    Pointing this out has been labeled a “Republican talking point” (as if the Republicans ever cared that much about balancing a budget). It is heartening, however, to see that journalists are willing to press Democrats on how they will actually pay for these extensive programs.

    Both Bernie Sanders and Elizabeth Warren suggest taxing the rich as a solution to the revenue problem their proposals would engender. They often liken their tax ambitions of making the rich “pay their fair share” to tax rates in Europe. A new report on marginal tax rates offers some perspective on that claim.

    EPICENTER, the European Policy Information Center located in Brussels, just released its “Taxing High Incomes” report, written in cooperation with the Swedish free-market think tank Timbro and the Tax Foundation, which answers the most interesting questions on marginal tax rates.

    The marginal tax rate is the rate that applies to the last unit earned. In a progressive tax system, this is the rate at which the last portion of a taxpayer’s income is taxed, meaning how much you pay on every additional dollar. A distinction is made between the marginal tax rate and the marginal effective tax rate, which also takes into account the amounts paid by the state to the taxpayer (allowances, subsidies, etc.). Thus, answering the question as to how much the rich really pay in taxes is a complicated one.

    This is why the EPICENTER report, comparing top effective marginal tax rates on labor income in 41 OECD (Office of Economic Cooperation and Development) and EU countries is so interesting. For instance, the report looks at social security contributions such as health care and pensions that are tied to previous income. As the authors explain, however, social insurance benefits are capped in most cases. Therefore, any social security contributions paid on high incomes can usually be regarded as pure taxes.

    The report outlines how many taxes can hit high-income earners on every additional dollar. Nominally lower income tax rates do not equate to lower marginal rates. For example:

    Hungary has a flat income tax of 15 percent while the United States has a progressive federal income tax with a top marginal tax rate of 37 percent. As payroll and consumption taxes are low in the United States, the effective marginal tax rate is not much higher, at 47 percent. In Hungary, on the other hand, substantial social security contributions are paid by both employers and employees. In addition, the country has the world’s highest VAT. The result is an effective tax rate of 57 percent—13 places higher than the United States in the country rankings.

    The United States actually does not have low marginal tax rates, as they close in on 50 percent for the highest earners. A number of analyzed states, namely Cyprus, Switzerland, Turkey, Chile, Slovakia, Lithuania, New Zealand, Mexico, and Bulgaria all end up with lower marginal tax rates.

    Is Sweden’s 76 percent tax rate the end goal of the Democratic candidates? If so, they should tread carefully. The EPICENTER report outlines the conflict between efficiency and equity in tax systems and explains how in the long run, high marginal tax rates can affect career choices and migration decisions in addition to lowering returns on education and entrepreneurship.

    As capital flight (people relocating due to high tax rates) increases and interest in investment and entrepreneurship diminishes, the question remains: who will pay for the programs Elizabeth Warren and Bernie Sanders are promising?

    Bill Wirtz

    Bill Wirtz is a Young Voices Advocate and a FEE Eugene S. Thorpe Fellow. His work has been featured in several outlets, including Newsweek, Rare, RealClear, CityAM, Le Monde and Le Figaro. He also works as a Policy Analyst for the Consumer Choice Center.

    Learn more about him at his website.

    This article was originally published on FEE.org. Read the original article.

  • Yes, a Currency Devaluation Is Very Much Like a Tax

    Britax is a global corporation with a manufacturing hub in Fort Mill, South Carolina where it employs 300. It is there that the company creates car seats for children. Unknown is how long it will continue to.

    While it’s surely risky to draw immediate correlation, James Politi of the Financial Times recently reported that Britax is thinking about relocating. The impetus for relocation is the tariffs the Trump administration has levied on foreign goods.

    It seems the car seat business is a low margin affair, and beginning in 2018, Britax suddenly faced a 10 percent tariff on the textiles it imports to cover its seats. The tax moved up to 25 percent after a breakdown of trade talks this past May, and then this month a new, 15 percent tariff on metallic inputs such as harnesses and buckles was imposed. The taxes levied on imported inputs Britax relies on to complete its car seats has put it at a disadvantage vis-à-vis car-seat makers located outside the U.S. According to Politi, foreign producers of the seats enjoy a tariff exemption care of the “U.S. trade representative for some, but not all, safety products.”

    It’s all a reminder of the basic truth that tariffs are a tax, plain and simple. Not only do they harm the businesses they’re naively assumed to protect by shielding them from market realities, they’re paid for by other businesses reliant on imported inputs; meaning all businesses.T

    Figure that something as prosaic as the pencil is a consequence of global cooperation, so imagine by extension just how much a car seat is the end result of production taking place around the world. In this case, the Trump administration falsely “protects” textile and metal companies located in the U.S., and the bill for the protection is sent to companies like Britax. The tax paid by the latter has shrunk its already slim margins even more.

    Interesting about tariffs is that they bring about agreement among people with differing ideologies. President Trump’s NEC head Larry Kudlow strongly believes that tariffs are a tax, as does Democratic presidential hopeful, and frequent Trump critic, Pete Buttigieg. Tariffs raise the cost of doing business, which means they’re a tax on earnings. It’s all very simple.

    Which is why the quietude about President Trump’s dollar stance is so strange. As some know, Trump would like a weaker dollar. He incorrectly believes a debased greenback would make U.S. industry more competitive. Except that it wouldn’t, and one reason that a falling dollar wouldn’t enhance the health of U.S. corporations is because currency devaluation is 100 percent a tax.

    Tariffs raise the cost of importing simply because a 10, 15 or 25 percent tariff is a tax above and beyond the price of the imported good in question. When Trump imposes tariffs that are paid for by importers, the U.S. Treasury ultimately collects the proceeds of same.

    With devaluation, much the same is at work. In this case, devaluation of the dollar logically raises the cost of importing foreign goods. It also raises domestic prices, but that’s another piece of commentary for another day. For now, it should be said that money is an agreement about value. If the agreement is shrunk such that it means something different, or is exchangeable for less, it’s only logical that the cost of importing foreign inputs is going to rise unless foreign producers are willing to accept haircuts for what they send our way.

    And what about the U.S. Treasury. While it doesn’t collect the “proceeds” of dollar devaluation in the way that it does the false fruits of tariffs, the result is the same. A dollar is yet again an agreement about value. If the exchangeable value of the dollar is shrunk, so shrinks what Treasury owes.

    Devaluation is most certainly a tax, and it has a very similar impact on corporations as a tariff. Not only does it raise the cost of purchasing the inputs necessary to produce market goods, it at the same time shrinks company earnings. If the dollar is devalued, so must shrink the value of the dollars a corporation takes in.

    For those who think a dollar is a dollar is a dollar, think again. No one earns dollars, as much as they earn what dollars can be exchanged for. There’s a big difference. If the value of the dollar decreases, so must we decrease the value of a dollar earned by a business.

    The previous paragraph helps explain why periods of dollar devaluation (think the 1970s, think the 2000s) correlate with greatly sub