Tag Archive for: Taxation

Video: The Democrats’ Horrible Racist Past

If one digs into the history of the Democratic Party one will find that they are: the party of slavery, the party of infanticide (eugenics to abortion), the party of Jim Crow laws, the party of the income tax, the party of prohibition. In this video Bill Little pins the tale on the Democrat Donkey.

Marriage and the (Forgotten) Middle Class Welfare State by Daniel Bier

Jason Kuznicki, in his wonderful post on marriage and the state, included this baffling chart of how the marriage penalty/bonus affects couples jointly filing tax returns:

Kuznicki points out that the penalty/bonus part is just an inevitable artifact of the progressive income tax system. The math just works out that way.

But, my friend Sean J. Rosenthal points out, the chart also shows Director’s Law: “Public expenditures are made for the primary benefit of the middle classes, and financed with taxes which are borne in considerable part by the poor and the rich.”

George Stigler, channeling the work of the great Chicago economist Aaron Director, coined the term in a 1970 article in the Journal of Law and Economics.

The logic of Director’s Law is:

Government has coercive power, which allows it to engage in acts (above all, the taking of resources) which could not be performed by voluntary agreement of the members of a society.

Any portion of the society which can secure control of the state’s machinery will employ the machinery to improve its own position.

Under a set of conditions… this dominant group will be the middle income classes.

Stigler went on to describe the Public Choice calculus for a wealthy modern democracy. In a society like ours, with our electoral institutions, the interests of the middle class will always have the biggest sway on public policy, since most people fall in the middle of the income distribution, rather than at bottom or the top.

Politicians will (and must) try to gratify the middle’s desires and shift the costs somewhere else — i.e., the rich and the poor and future generations, since they have relatively less influence on public policy. (Though this general rule is not to say that there aren’t also policies that primarily benefit the poor or the wealthy.)

This explains a lot of features of public policy that don’t fit with the normal “welfare is all about the poor” or “the rich run everything” paradigms.

For instance, Obamacare’s insurance scheme is basically all a big subsidy for older, relatively wealthier middle class people at the expensive of younger, poorer people. The other half of Obamacare, the Medicaid expansion, increases eligibility for Medicaid up to 400% of the poverty line — that safety net is catching some pretty middling fish at this point.

Medicare and Social Security, the marriage penalty/bonus distribution, college student loans, tax write-offs for mortgage payments and employer-sponsored health insurance, small business favoritism, and a host of other policies are essentially giveaways to the middle class, at the expense of the rich and poor.

Nonetheless, we should expect politicians to continue harping on the plight of the middle class, stroking voters’ fears and concerns about the “shrinking middle,” promising to “rebuild the middle class,” pass “tax cuts for the middle class,” save “Main Street,” and on, and on.

And who could ever be against helping middle class? Nobody. And that’s how we end up being content with a marriage policy that punishes poor (and rich) working couples, even while pundits bemoan the state of marriage.

Update #1: As with many later developments in economics, Frederic Bastiat anticipated Public Choice by more than a hundred years. In his Selected Essays on Political Economy, recently republished by FEE, he wrote,

When, under the pretext of fraternity, the legal code imposes mutual sacrifices on the citizens, human nature is not thereby abrogated. Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices.

Now, is it the most unfortunate who gain in this struggle? Certainly not, but rather the most influential and calculating.

Update #2: I see that Director’s Law was first mentioned in the Freeman, before Stigler published on it in JLE, in John Chamberlain’s coverage of the 1969 Mont Pelerin Society meeting in Venezuela.

Daniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

Bernie Sanders Thinks the Middle Class Is Deteriorating: He’s Wrong! by Corey Iacono

Sen. Bernie Sanders is a democratic socialist running for President of the United States, and his passionate populist message has won him many admirers on the left. His willingness to push for radical progressive policies (such as top income tax rates of 90 percent), which mainstream Democrats are too moderate to embrace, is steadily eroding Hillary Clinton’s dominance of the Democratic primary field.

There are several “facts” upon which Sanders has built his campaign. Probably the most important is the claim that the American middle class has been declining for quite some time. According to Sanders’s website:

The long-term deterioration of the middle class, accelerated by the Wall Street crash of 2008, has not been pretty…

Since 1999, the median middle-class family has seen its income go down by almost $5,000 after adjusting for inflation, now earning less than it did 25 years ago.

The situation is clearly dire, and the right man for the momentous job of saving the middle class is Sen. Sanders. Well, at least that’s [the] message his campaign seeks to convey.

But what if the middle class isn’t becoming worse off over time? What if the American middle class is actually doing as well as ever? Would Sanders’s supporters be as likely to endorse his more radical ideas if they weren’t convinced that the middle was becoming poorer over time — and that only progressive policies could reverse this trend?

It’s worth taking the time to examine Sanders’s claim that the middle class is worse off now than in the past. He doesn’t cite a source for his statistic, but it seems to rely on looking at the median household income over time and adjusting for inflation using the Consumer Price Index (CPI).

This is a problematic methodology because it does not control for the well-known fact that the median household has itself grown smaller over time. Even if median income stayed the same over time, a decline in the number of people in the median household over time would lead to an increase in income per household member.

Additionally, Sanders’s statistic looks at income before taxes and transfers. Transfer payments and tax credits (like the Earned Income Tax Credit) make up a significant portion of income for many lower-income families. Not controlling for these factors understates their true economic well-being.

The figures cited by Sanders also fail to take into account the fact that a larger proportion of worker compensation comes in the form of non-cash benefits (such as health insurance) now than in the past.

According to research published by the National Tax Journal, “Broadening the income definition to post-tax, post-transfer, size-adjusted household cash income, middle class Americans are found to have made substantial gains,” amounting to a 37 percent increase in income over the 1979-2007 period.

Similarly, in 2014, the Congressional Budget Office found that adjusting for changing household size and looking at income after taxes and transfers, households in all income quintiles are much better off than they were a few decades ago.

The incomes of households in the three middle income quintiles grew 40 percent between 1979 and 2011. Somewhat surprisingly, given the histrionics about the state of America’s poor, income in households in the lowest quintile was 48 percent higher in 2011 than it was in 1979.

Research from the Federal Reserve Bank of Minneapolis comes to even more optimistic conclusions.

The Consumer Price Index is widely understood to overstate inflation — among other reasons, by failing to accurately account for improvements in quality and consumer substitutions for newer or cheaper goods — which is why the Federal Open Market Committee uses an alternative measurement for inflation, the Personal Consumption Expenditures (PCE) price index, which includes more comprehensive coverage of goods and services than the CPI.

If the CPI does, in fact, overstate the extent to which prices rise over time, then it also consequently understates the growth in real, inflation-adjusted incomes over time.

Indexing median household income (post taxes and transfers) to inflation using the PCE, rather than the CPI, and adjusting for the long-run decline in household size shows that median incomes have “increased by roughly 44 percent to 62 percent from 1976 to 2006.”

Moreover, the focus on statistical categories ignores what is happening at the level of individuals and households, which may move up or down the income ladder, through different income quintiles. And studies have consistently shown that this income mobility has not changed in decades.

While the rate of growth for some income categories in recent years has been sluggish, the claim that middle incomes are declining precipitously is false. Based on these findings, it seems appropriate to conclude that Sanders’ claim that there exists a “long-term deterioration of the middle class” is patently untrue.

Learn more about wage “stagnation” from former FEE president Don Boudreaux:

Corey Iacono

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

Europe Needs Regime Change in Greece: They Won’t Get It by Stephen Davies

It seems the saga of negotiations between the Greek Government and its creditors has arrived at a denouement but almost certainly not a final conclusion, and we may expect this show to return to the stage at some point, probably in the near future. The reason for this is the real nature of the ultimate problem facing both parties, something of which the creditors are still unaware.

The negotiations over the last few months have been marked by a remarkable degree of acrimony. Most of the other eurozone governments have become increasingly (and publicly) exasperated with the Greeks, and the expressions of hostility towards the Greek government from members of national parliaments have grown ever more outspoken.

Some of the reasons for this are well known — above all, the lack of a true European demos: there simply is not the kind of solidarity or shared interest in Europe that one finds in, for example, the United States.

However, there is another reason for the acrimony that has not received much attention. The creditors misunderstand what it is they are asking the Greek government and society to do. This lack of understanding is why any deal made now is likely to prove a disappointment.

The impression given by media reports is that this is all about debt, specifically the debts run up by the Greek state before 2009. Certainly there is a problem, but it is one that is soluble and does not require the kind of fraught negotiations we have seen.

The difficulty is that the fiscal state of Greece before the first bailout in 2010, and the underlying state of the Greek economy, are symptoms of a much more serious underlying problem. This is one not of debt but of competitiveness.

Quite simply the Greek economy is not productive enough to support the levels of income and public spending that it now has, without significant capital inflows from outside Greece. Before 2008 these came in the form of private loans, since then by government bailouts (even if much of this has been recycled back to private creditors).

Greek firms and labour are simply not competitive with their counterparts elsewhere in Europe, above all in Germany. Being in the euro means that they cannot adopt the traditional way of regaining at least some competitiveness by devaluing their currency. Instead, they have to deflate internally, and the attempt to do this has devastated economic life in Greece.

This is all well known. It is the reason why the creditors are demanding that, in return for a third bailout, the Greek government introduce a series of reforms to public spending, the tax system, and the machinery of the Greek state, particularly it’s tax collecting apparatus. Successive Greek government have either refused to do this or promised to do it and then failed. This is why the rest of the eurozone is becoming ever more exasperated. It here however that the misunderstanding comes in to play.

What the creditors think they are asking for is a major shift in public policy. They recognise that the shift they are asking for is radical, and many also realise that what would be involved would be a shift in the general ideological basis of Greek politics, towards a more market liberal direction. However, they are actually, without realising it, asking for something much more fundamental and drastic.

One question that should be asked is why Greece got into a position that was so much worse than that of other “peripheral” economies. Also, why has the performance of the Greek economy been so much worse than that of other countries that have had bailouts and austerity, such as Spain, Portugal, and Ireland? The answer lies in the fundamental nature of the Greek state and the political economy of Greece.

Greek political culture is dominated by practices and institutions that certainly exist elsewhere in Europe but are not as dominant. The state has a narrow tax base, with powerful interests such as the Orthodox Church effectively exempt. The revenue collection apparatus is completely ineffective so that tax evasion is endemic at every level of income.

This means that simply raising or extending VAT for instance is not enough because so many transactions are off the books. At the same time, the Greek state provides generous pensions and other benefits, which it cannot fund.

The political system appears to be a modern democracy but is in fact a much older model. The key institution is clientelism, in which political actors give out rewards to their clients in the shape of handouts and sinecures in the very large public sector. This is done much more directly than with the kind of interest group politics that we find in most democratic countries, and it is central to the whole way that politics works.

The extent of patronage means that the Greek government (whoever they are) does not have a modern, Weberian, bureaucracy to call on. Instead, most of the people in the public service owe their positions to networks of patronage and these command their loyalty.

The economy is highly regulated in ways that entrench settled interests and inhibit innovation. In particular, a very wide range of occupations are subject to rules that make it very difficult for new entrants into those sectors. Because of the inefficiency and the existence of a plethora of rules that are irksome but ultimately unenforceable, corruption is endemic and widespread throughout Greek society.

This system cannot maintain anything like the standard of living to which most Greeks aspire and as such it means that, via membership of the euro, we have seen the development of an economy that depends upon inward transfers — to a much greater degree than is the case in countries such as Spain and Ireland.

Given all this, it becomes clear that what the creditors are asking for is much more than a shift in policy, no matter how sharp and dramatic. Policy shifts of that kind are part of the normal or regular political process that take place infrequently, but still regularly, in most polities. The shift brought about by Margaret Thatcher’s election in 1979 is an example.

What is needed in Greece, and what the creditors are asking for without realising it, is something more fundamental, a change in the very nature of the political system and in the entire nature of politics and government, rather than a change of policy within a system. This is a regime change in the original and correct use of that term.

The point of course is that changes of this kind are extremely difficult and only happen extremely rarely. Sometimes it requires a revolution, as in France; on other occasions, it takes place in the context of a fundamental crisis such as defeat in a major war. Very rarely it can happen when there is a near consensus in a society over what to do, as in Japan in the 1870s.

The current Greek government is almost certainly aware of this, but, apart from ideological objections to part of the list of reforms, they are quite simply unable, rather than unwilling, to do what is asked because a change in the political order is simply very, very hard.

So the creditors are likely to be disappointed and will then become even more enraged. Moreover, being in the euro makes any attempt at systemic change in Greece even more difficult than it would be already, because if removes a range of policy options that could alleviate some of the transition costs.

As most economists of all persuasions now think, the best option is a managed Greek exit from the euro. If this does not happen (as seems likely) then this farce is a production that will run for some time.

Stephen Davies

Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.

California Government Puts Uber on Blocks by Jeffrey A. Tucker

The California Labor Commission, with its expansive power to categorize and codify what it is that workers do, has dealt a terrible blow to Uber, the disruptive ride-sharing service. In one administrative edict, it has managed to do what hundreds of local governments haven’t.

Every rapacious municipal taxi monopoly in the state has to be celebrating today. It also provides a model for how these companies will be treated at the federal level. This could be a crushing blow. It’s not only the fate of Uber that is at stake. The entire peer-to-peer economy could be damaged by these administrative edicts.

The change in how the income of Uber drivers is treated by the law seems innocuous. Instead of being regarded as “independent contractors,” they are now to be regarded as “employees.”

Why does it matter? You find out only way down in the New York Times story on the issue. This “could change Uber’s cost structure, requiring it to offer health insurance and other benefits, as well as paying salaries.”

That’s just the start of it. Suddenly, Uber drivers will be subject to a huge range of federal tax laws that involve withholding, maximum working hours, and the entire labor code at all levels as it affects the market for employees. Oh, and Obamacare.

This is a devastating turn for the company and those who drive for it.

Just ask the drivers:

Indeed, there seems to be no justification for calling Uber drivers employees. I can recall being picked up at airport once. Uber was not allowed to serve that airport. I asked the man if he worked for Uber. He said he used to but not anymore.

“When did you quit?”

“Just now,” he said. Wink, wink. He was driving for himself on my trip.

“When do you think you will work for Uber again?”

“After I drop you off.”

That’s exactly the kind of independence that Uber drivers value. They don’t have to answer any particular call that comes in. They set their own hours. They drive their own cars. When an airport bans Uber, they simply redefine themselves.

They can do this because they are their own boss; Uber only cuts them off if they don’t answer a call on their mobile apps for 180 days. But it is precisely that rule that led the commission to call them “employees.”

That’s a pretty thin basis on which to call someone an employee. And it’s also solid proof that the point of this decision is not to clarify some labor designation but rather to shore up the old monopolies that want to continue to rip off consumers with high prices and poor service. No surprise, government here is using its power to serve the ruling class and established interests.

This is exactly the problem with government regulations that purport to define and codify every job. Such regulations tend to restrict the types and speed of innovation that can occur in enterprises.

The app economy and peer-to-peer network are huge growth areas precisely because they have so far manage to evade being codified and controlled and shoe-horned into the old stultifying rules.

If everyone earning a piecemeal stream of income is called an employee — and regulated by relevant tax, workplace, and labor laws — many of these companies immediately become unviable.

There will be no more on-demand hair stylists, plumbers, tennis coaches, and piano teachers. The fate of a vast number of companies is at stake. The future is at stake.

For now, Uber is saying that this decision pertains to this one employee only. I hope that this claim is sustainable. If it is not, the regulators will use this decision to inflict a terrible blow on the brightest and fastest growing sector of American economic life.

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.

Rome: Money, Mischief, and Minted Crises by Marc Hyden & Lawrence W. Reed

Ancient Rome wasn’t built in a day, the old adage goes. It wasn’t torn down in a day either, but a good measure of its long decline to oblivion was the government’s bad habit of chipping away at the value of its own currency.

In this essay we refer to “inflation,” but in its classical sense — an increase in the supply of money in excess of the demand for money. The modern-day subversion of the term to mean rising prices, which are one key effect of inflation but not the inflation itself, only confuses the matter and points away from the real culprit, the powers in charge of the money supply.

In Rome’s day, before the invention of the printing press, money was gold and silver coin. When Roman emperors needed revenue, they did more than just tax a lot; like most governments today, they also debased the money. Think of the major difference between Federal Reserve inflation and ancient Roman inflation this way: We print, they mint(ed). The long-term effects were the same—higher prices, erosion of savings and confidence, booms and busts, and more. Here’s the Roman story.

Augustus (reigned 27 BC – 14 AD), Rome’s first real emperor, worked to establish a standardized system of coinage for the empire, building off of the Roman Republic’s policies. The silver denarius became the “link coin” to which other baser and fractional coins could be exchanged and measured. Augustus set the weight of the denarius at 84 coins to the pound and around 98 percent silver. Coins, which had only been sporadically used to pay for state expenditures in the earlier Republic, became the currency for everyday citizens and accepted as payment for commerce and even taxation in the later Republic and into the imperial period.

Historian Max Shapiro, in his 1980 book, The Penniless Billionaires, pieces various sources together to conclude that “the volume of money he (Augustus) issued in the two decades between 27 BC and 6 AD was more than ten times the amount issued by his predecessors in the twenty years before.” The easy money stimulated a temporary boom, leading inevitably to price hikes and eventual retrenchment. Wheat and pork prices doubled, real estate rose at first by more than 150 percent. When money creation was slowed (late in Augustus’s reign and even more for a time under that of his successor, Tiberius), the house of cards came tumbling down. Prices stabilized but at the cost of recession and unemployment.

The integrity of the monetary system would remain intact until the reign of Emperor Nero (54-68 AD). He is better known for murdering his mother, preferring the arts to civic administration, and persecuting the Christians, but he was also the first to debase the standard set by Augustus. By 64 AD, he drained the Roman reserves because of the Great Fire of Rome and his profligate spending (including a gaudy palace). He reduced the weight of the denarius to 96 coins per pound and its silver content to 93 percent, which was the first debasement of this magnitude in over 250 years. This led to inflation and temporarily shook the confidence of the Roman citizenry.

Many successive emperors incrementally lowered the denarius’s silver content until the philosopher-emperor, Marcus Aurelius (reigned 161-180 AD), further debased the denarius to 79 percent silver to pay for constant wars and increased expenses. This was the most impure standard set for the denarius up to this point in Roman history, but the trend would continue. Aurelius’ son Commodus(reigned 177-192 AD), a gladiatorial wannabe, was likewise a spendthrift. He followed the footsteps of his forebears and reduced the denarius to 104 coins to the pound and only 74 percent silver.

Every debasement pushed prices higher and gradually chipped away at the public faith in the Roman monetary system. The degradation of the money and increased minting of coins provided short-term relief for the state until merchants, legionaries, and market forces realized what had happened. Under Emperor Septimius Severus’ administration (reigned 193-211 AD), more soldiers began demanding bonuses to be paid in gold or in commodities to circumvent the increasingly diminished denarius. Severus’ son, Caracalla (reigned 198-217 AD), while remembered for his bloody massacres, killing his brother, and being assassinated while relieving himself, advanced the policy of debasement until he lowered the denarius to nearly 50 percent silver to pay for the Roman war machine and his grand building projects.

Other emperors, including Pertinax and Macrinus, attempted to put Rome back on solid footing by increasing the silver content or by reforming the system, but often when one emperor improved the denarius, a competitor would outbid them for the army’s loyalty, destroying any progress and often replacing the emperor. Eventually, the sun set on the silver denarius as Rome’s youngest sole emperor, Gordian III (238-244 AD), essentially replaced it with its competitor, the antoninianus.

However, by the reign of the barbarian-born Emperor Claudius II (reigned 268-270 AD), remembered for his military prowess and punching a horse’s teeth out, the antoninianus was reduced to a lighter coin that was less than two percent silver. The aurelianianus eventually replaced the antoninianus, and the nummus replaced the aurelianianus. By 341 AD, Emperor Constans I (reigned 337-350 AD) diminished the nummus to only 0.4 percent silver and 196 coins per pound. The Roman monetary system had long crashed and price inflation had been spiraling out of control for generations.

Attempts were made to create new coins similar to the Neronian standard in smaller quantities and to devise a new monetary system, but the public confidence was shattered. Emperor Diocletian (reigned 284-305 AD) is widely known for conducting the largest Roman persecution of Christians, but he also reformed the military, government, and monetary system. He expanded and standardized a program, the annona militaris, which essentially bypassed the state currency. Many Romans were now taxed and legionaries paid in-kind (with commodities).

Increasingly, Romans bartered in the marketplace instead of exchanging state coins. Some communities even created a “ghost currency,” a nonexistent medium to accurately describe the cost and worth of a product because of runaway inflation and the volatility of worthless money. Diocletian approved a policy which led to the gold standard replacing the silver standard. This process progressed into the reign of Rome’s first Christian emperor, Constantine (reigned 306-337 AD), until Roman currency began to temporarily resemble stability.

But Diocletian did something else, and it yielded widespread ruin from which the Empire never fully recovered. In the year 301 AD, to combat the soaring hyperinflation in prices, he issued his famous “Edict of 301,” which imposed comprehensive wage and price controls under penalty of death. The system of production, already assaulted by confiscatory taxes and harsh regulations as well as the derangement of the currency, collapsed. When a successor abandoned the controls a decade or so later, the Roman economy was in tatters.

The two largest expenditures in the Roman Empire were the army, which peaked at between 300,000-600,000 soldiers, and subsidized grain for around 1/3 of the city of Rome. The empire’s costs gradually increased over time as did the need for bribing political enemies, granting donatives to appease the army, purchasing allies through tributes, and the extravagance of Roman emperors. Revenues declined in part because many mines were exhausted, wars brought less booty into the empire, and farming decreased due to barbarian incursions, wars, and increased taxation. To meet these demands Roman leaders repeatedly debased the silver coins, increasingly minted more money, and raised taxes at the same time.

In a period of about 370 years, the denarius and its successors were debased incrementally from 98 percent to less than one percent silver. The massive spending of the welfare/warfare state exacted a terrible toll in the name of either “helping” Romans or making war on non-Romans. Financial and military crises mixed with poor leadership, expediency, and a clear misunderstanding of economic principles led to the destruction Rome’s monetary system.

Honest and transparent policies could have saved the Romans from centuries of economic hardships. The question future historians will answer when they look back on our period is, “What did the Americans learn from the Roman experience?”

(For more on lessons from ancient Rome, visit www.fee.org/rome).

Marc Hyden is a political activist and an amateur Roman historian. Lawrence W. Reed is President of the Foundation for Economic Education.

Marc Hyden

Marc Hyden is a conservative political activist and an amateur Roman historian.

Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.