I’m tempted to say that statism is sort of like a cult. Proponents of socialism and other big-government ideologies have a dogmatic zeal that blinds them to reality.

For instance, no nation has ever become rich with big government. But that doesn’t stop leftists from advocating in favor of higher taxes and more coercive redistribution.

They are equally capable of rationalizing that economic misery in places such as Greece and Venezuela has nothing to do with bad policy, and you can even find a few zealots willing to defend basket cases such as Cuba and North Korea.

So long as they don’t burn me at the stake for my heretical views, I guess I won’t get too agitated by their bizarre fetish for statism.

But I will periodically mock them. And that’s the purpose of today’s column. We’ll start with this nice comparison between a capitalist grocery store and a socialist grocery store. I have no idea, by the way, if the lower image actually is a supermarket in a socialist country, but let’s not forget that a real-world version of this comparison is one of the reasons there’s no longer an Evil Empire.

But the bad news about socialism is not limited to economic deprivation for the masses.

The system also leads in many cases to totalitarianism (see this article by Marian Tupy, for example).

Venezuela is a particularly poignant example. Once the richest nation in Latin America, it now is an economic laggard and also is a cesspool of oppression.

Which makes this set of images from Reddit‘s libertarian page both funny and sad.

As you might expect, Milton Friedman had some very pointed observations on this topic.

The really good part starts shortly before 2:00. He explains very clearly that socialism is based on force and coercion.

I’ve saved the best for last.

The PotL sent me this collection of risky temptations and it perfectly captures the attitude of many statists. No matter how many times socialism has failed, they never learn the appropriate lesson. It just hasn’t been tried by the right people, they tell us. Or been imposed in the right circumstances.

So they want us to give it one more try, just like a person with no willpower will eat one more bite of chocolate.

Which is the same message you find here, here, and here.

Incidentally, this analysis not only applies to socialism, as technically defined, but it also applies to redistributionism. Which is definitely more benign, but nonetheless produces bad results.

The bottom line is that statism is a recipe for stagnation and free markets are a route to prosperity.

Republished from International Liberty.

Daniel J. Mitchell

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review. 

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

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Now that Donald Trump has been elected, one of my main goals will be to convince him and his team that it would be wrong to leave government spending on autopilot (and it would be even worse to spend more money and increase the burden of government!).

Since Trump semi-endorsed the Penny Plan, I don’t think this is a hopeless quest. But it will be an uphill battle since populists have a “public choice” incentive to appease interest groups.

But we have a very powerful weapon in this battle. It’s called evidence.

And now there’s even more data on our side. The Institute for Economic Affairs in London has just published an excellent new book on fiscal policy. Edited by Philip Booth, Taxation, Government Spending, & Economic Growth is must reading for those who want to understand the deleterious impact of the modern welfare state.

The IEA’s Director General, Mark Littlewood, explains the goal in the book’s foreword.

The most depressing part of the book is contained in Chapter 3. As you can see from Table 7, the burden of government used to be rather modest in western nations. Indeed, I’ve made the point that it was during the era of small government that the western world became rich.

But now look at the numbers. Pay special attention to the period between 1960 and 1980, which is when the welfare state exploded in many of the countries (aided and abetted by the value-added tax).

But let’s not cry about unfortunate historical developments.

It will be more productive if we measure the harm so we can educate policy makers about the need for spending restraint.

And the book is filled with lots of useful information in that quest. In Chapter 4, David Smith explains the interaction between fiscal policy and economic performance, noting that excessive government not only reduces the level of economic output, but also the future growth rate.

…increased governmental consumption appears to reduce national output. This is likely to be because the resources diverted to supply such expenditures would be better employed in the private sector. In particular, the evidence from international cross-section and panel-data studies suggests that almost all increases in the share of governmental expenditure in GDP lead to a near one-for-one reduction in the share allocated to private capital formation. This under-capitalisation takes the economy onto a lower, but parallel, growth path according to ‘neo-classical’ growth models but leads to an additional permanent reduction in the growth rate in the context of a ‘post-neo-classical endogenous-growth’ model.

He provides a micro-economic explanation for why various government activities hinder growth (I offer eight reasons in this video, by the way).

Transfer payments are likely to reduce economic growth in various ways, not least because of the supply-side effects of the taxes necessary to finance them. Unlike with government investment, there is unlikely to be any offsetting effect on growth. These have grown rapidly over the last century. Transfers in the form of pensions and other payments to people at older ages are likely to reduce saving in the private sector and fixed capital formation. However, the most potentially counter-productive public expenditure appears to be paying means-tested welfare benefits to the population of working age. These reduce potential GDP because of their impact in reducing the supply of labour to the private sector, which exacerbates the effect of the taxes necessary to finance them. …there has been a big increase in government spending over the last 100 years. However, within the government spending envelope, there has been a particularly large increase in those items that damage the economy most while those items that tend to have a beneficial effect on growth or which damage the economy least have been reduced.

In other words, he’s saying that not only is government too big. He’s also pointing out that much of the spending is seemingly designed to impose economic damage by discouraging the productive use and allocation of labor and capital.

I also like that he explains that the real problem is spending, not just red ink (a point I often make, but not always successfully, when talking to politicians).

…statistical evidence that suggests that the negative effects of higher taxes and budget deficits on private activity are identical in the long run and quite similar in the short term. This confirms that the primary issue is the size of state spending compared with national output and that the choice between tax and bond finance is a secondary consideration. Ultimately, government spending is financed either by taxes levied now or deferred taxes.

He then reviews some of the research on the “Rahn Curve.”

…it is reasonable to ask whether there are ‘growth-maximising’ or ‘welfare-maximising’ levels of government expenditure. …The growth-maximising share of government spending in GDP was some 20–25 per cent of GDP. This was based on the fact that ratios in this range were typical of the fast growing South East Asian ‘Tiger’ economies, countries such as Japan and Korea in their high growth phases, and even Australia, Canada and Spain in the 1950s. This indicative range should probably be revised down to some 18.5–23.5 per cent, using current (June 2016) UK definitions.

Incidentally, I like and dislike what he wrote in this section.

I like it because the obvious conclusion is that the burden of government is excessive in both the United States (37.9 percent of GDP according to OECD fiscal data) and the United Kingdom (43.3 percent of GDP). And we can use this data to argue for much-needed spending restraint.

But I don’t like the above passage because I think the growth-maximizing size of government is well below 20 percent of GDP. As I’ve previously explained, academic researchers are constrained by the lack of data for small-government economies. So when they crunch numbers (relying in all cases on post-WWII data, and in most cases on much more recent figures), they basically find that Hong Kong and Singapore grow the fastest and they think that implies the public sector should consume 20 percent of economic output.

But that implies, if you recall the data in Table 7 from above, that nations would have enjoyed more growth in 1870 if they doubled the burden of government spending. I think that’s nonsensical. What’s really happening is that researchers are simply measuring the downward-sloping portion of the Rahn Curve.

But just because Hong Kong and Singapore are the first two jurisdictions that can be plotted, that doesn’t mean the Rahn Curve peaks at that point.

But I realize I’m nit-picking, so let’s go back to the book.

In the following chapter, Professor Patrick Miniford shares some additional research on the link between government spending and economic performance. I especially like how he shares a very useful table looking at some scholarly findings on the relationship between the overall fiscal burden and national prosperity.

He also shares the conclusions from additional research.

Later studies show similar associations. For example, Afonso and Furceri (2008) examine a number of EU and other OECD countries over the period 1970–2004. As well as several components of government expenditure and taxation, they include variables such as initial output, population growth, investment ratio, human capital and openness. Their finding is that a 1 percentage point rise in the government spending to GDP ratio cuts growth in the OECD by 0.12 per cent and in the EU by 0.13 per cent. …overall, the tax (or government spending) and growth studies, indicate a strong association between the two variables. As a rule of thumb, it would appear that a 10 percentage point fall in the share of national income taken in tax would lead to slightly more than a 1 percentage point increase in the growth rate – results of this order of magnitude occur over and over again.

And he discusses some new statistical findings, along with the potential implications for the United Kingdom.

…the relationship between the growth rate of GDP per capita, the tax rate, a dummy variable specific to each time period, and a dummy variable specific to each country is modelled. Panel data were used that were averaged over consecutive decades from 1970 to 2000 for 100 countries. …overall, the modelling found an overwhelmingly strong negative relationship between tax and growth…there is an elasticity of growth to tax of approximately –1.4 at the mean of the growth rate (1.6 per cent). …a fall in the tax rate by 25 per cent of its existing value (from about 40 per cent to about 30 per cent of national income in the UK) would lead to a rise in the growth rate to 2.7 per cent if the initial growth rate were 2 per cent. This is roughly in line with the growth regression results discussed above.

I’m sure the data and conclusions also apply to the United States.

Which brings me back to where I started. I fretted yesterday that Trump’s election will be a challenge to advocates of economic liberty. Indeed, he explicitly called for more infrastructure spending and implicitly called for more VA spending in his acceptance speech. Combined with his apparent rejection of entitlement reform, this doesn’t instill much confidence.

But that’s all the more reason to disseminate this new research on the bad consequences of letting America become more like France.

Republished from Dan Mitchell's blog.

Daniel J. Mitchell

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review. 

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

MORE FROM LIBERTYLOL:

Since the first Presidential Debate, there has been a lot of hue and cry because Donald Trump had the temerity to declare that he paid no income taxes. More specifically Hillary Clinton said, about his refusal to make his income tax statements public:

"There is something he is hiding. Or maybe he doesn't want the American people to know that he's paid nothing in federal taxes, because the only years that anybody's ever seen were a couple of years when he had to turn them over to state authorities when he was trying to get a casino license, and they showed he didn't pay any federal income tax."

Trump retorted, "That makes me smart," more or less declaring he didn't pay any income taxes and he's proud of it.

And so he should be.

To be sure, he is vulnerable to the charge of hypocrisy, not paying tax, on one hand, and advocating what could turn out to be the largest infrastructure project in American history on the other, in addition to kvetching about crumbling infrastructure and declining military spending.

Yet, on the matter of taxes alone, he is right.

Judge Learned Hand stated that "anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands." (Gregory v. Helvering 69 F.2d 809 - 1935)

Ironically, that judgment went against the taxpayer, something not often noted by those who quote it. The issue is known as the doctrine of substance over form. In that particular case, a businesswoman named Evelyn Gregory had swapped assets between two corporations, then dissolved one of them which distributed the assets to her as owner. She then claimed a lower tax liability as a result.

In an analysis of Hand's contribution to tax law, Yale law professor Marvin Chirelstein notes that the courts "follow no single and consistent set of rules in deciding when to accept and when to disregard the taxpayer's choice of form" and that when the courts reject the citizen's chosen form of organization, they "commonly assert as a matter of principle that the incidence of taxation depends upon the substance of a transaction and that mere form is not controlling." But if the form is accepted, Hand's maxim reigns - "There is nothing sinister in so arranging affairs as to keep taxes as  low as possible."

That is why many businesses hire tax attorneys to advise them of the best options available to them.This results in a contradictory position. "In practice the first principle means simply that the range of effective choice is limited in the situation under review, or indeed that the only route to the taxpayer's destination is the one that bears the highest tax. By contrast the second principle, when applicable, confirms that the availability of alternative legal procedures also gives the taxpayer a right of election with respect to the tax consequences."

What this means is that tax law is inconclusive and vague, but there's no harm in trying to keep taxes low. That is why many businesses hire tax attorneys to advise them of the best options available to them.

Everyone Should Do It

This is not just a privilege of the rich, though they might have more options available and the means to hire skilled tax lawyers. Every citizen has options available so as to limit or lower her taxes. These include such things as the various Individual Retirement Plans (IRAs) which confer certain tax advantages. Additionally, interest paid on a loan for business purposes is tax deductible. Many people run small businesses from their homes in order to deduct some of their living expenses.

A recent article in the New York Times looking at the Trump tax imbroglio notes that tax write-offs for start-up business ventures are generous. "There was a point when even ruinous projects like an unfinished, unleased office tower could end up producing a profit for some investors, thanks to ample tax write-offs."

Such loopholes, the article notes, were largely closed off for outside investors when the Reagan administration overhauled the tax act in 1986. "But active real estate investors and developers were allowed to keep that tax break."

The article notes that when Trump had to disclose his tax filings to get a casino license back in the 80s, there were two years, 1978 and 1979, in which Trump paid no income taxes at all. "By taking advantage of deductions available to real estate developers and claiming losses from partnerships, Mr. Trump reported a “negative income” of $406,379 in 1978 and $3.4 million in 1979 — thus avoiding any tax liability for those two years, a time when he claimed to be worth hundreds of millions of dollars."

The article notes further that Trump paid no income taxes in 1984, 1991 and 1993. The Donald was losing money on his Atlantic City casinos in those latter years which would have put him under water. But that is what entrepreneurship is all about. You take risks, including the risk of loss. And during the losing years, you pay no taxes. That is not, despite the agitations of the professional teeth gnashers, a bad thing. Nor is it shady or underhanded or in any way blameworthy.

The Widespread Demand to Pay as Little as Possible

We recently visited friends who live in a gated community on Vancouver Island. It's a fairly wealthy strata community and our host told us about one neighbor who boasts that he pays no income tax. I was amazed as I pay some tax even on my pension income. I wondered how he did it. But thinking about it, I can think of many ways in which a retired person with substantial assets can have a decent income and pay no income tax at all. These are options open to all my fellow Canadians who have accumulated some wealth during their working lives.

If they have a beef, it should be with the governments making those tax laws, not with people and businesses making reasonable business decisions.These include Tax Free Savings Accounts (similar to Roth IRAs in the United States), reverse mortgages, remortgaging properties and so on. There is no capital gains tax in Canada on your principal residence. So if you bought a house in Vancouver for under $50,000 forty years ago which is worth over a million today, you can sell it and pocket that million bucks tax free. It's all above board and legal.

Corporations often use differences in jurisdictional tax laws to avoid taxes by having subsidiaries in other countries. Ireland, for example, has some of the lowest corporate tax rates in the world and some companies use Irish subsidiaries to avoid paying American taxes.

The professional crying in their soupers, of course, think this is a dastardly thing. But again, these companies are making use of existing legislation to minimize their tax liabilities. What's wrong with that? If they have a beef, it should be with the governments making those tax laws, not with people and businesses making reasonable business decisions.

Indeed, Ireland gives generous tax benefits to creative artists. You can earn up to fifty thousand euros tax free if you live there if you are a cultural worker – a writer, a composer or a sculptor. No one seems to object to that but they cry a river when corporations use advantageous tax laws in other jurisdictions.

Loopholes Liberate

Tax avoidance is as American as apple pie.Like Clinton in the debate, the professional whinging class like to spout off all the things that the taxes would buy if only Trump or businesses or you and me were sacrificially minded enough. Clinton said, "So if he's paid zero, that means zero for troops, zero for vets, zero for schools or health."

A site denouncing the Irish tax haven says America's three largest tech giants have avoided $8 billion over the years, money that could have paid for health insurance for 4 million kids, salaries for 200,000 teachers or pay for the California highway patrol for four years. A recent meme from Occupy Democrats says not paying taxes makes Trump, not smart, but "a selfish unpatriotic crook". 

Even the Clintons use trusts and charities that they control to minimize taxes. And what's wrong with that? Nothing.

Remember that America was founded to a large extent on a tax revolt - the Boston tea party. Tax avoidance is as American as apple pie.

The holier than thou types should consider again Judge Hand's words. "There is (no) patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

Amen to that!

Marco den Ouden

Marco den Ouden writes at The Jolly Libertarian.

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