Free Markets, Free People

marginal tax rate

US average marginal effective tax rate about 40%?

So tell me again why the government can’t seem to get along with what it already gets?

Taking into account all taxes on earnings and consumer spending—including federal, state and local income taxes, Social Security and Medicare payroll taxes, excise taxes, and state and local sales taxes—Edward Prescott has shown (especially in the Quarterly Review of the Federal Reserve Bank of Minneapolis, 2004) that the U.S. average marginal effective tax rate is around 40%. This means that if the average worker earns $100 from additional output, he will be able to consume only an additional $60.

And yet the prevailing political attitude seems to be that of France’s “leadership”, i.e. government, has first claim on all your earnings and if you protest you’re “greedy”.

Who’s greedy?

Speaking of France, California seems bound to duplicate its latest tax scheme:

Consider California, which just enacted higher rates of income and sales tax. The top California income-tax rate will be 13.3%, and the top sales-tax rate in some areas may rise as high as 10%. Combine these state taxes with a top combined federal rate of 44%, plus federal excise taxes, and the combined marginal tax rate for the highest California earners is likely to be around 60%—as high as in France, Germany and Italy.

Yet they wonder why people are fleeing the state.

Impact and implications?

Higher labor-income and consumption taxes also have consequences for entrepreneurship and risk-taking. A key factor driving U.S. economic growth has been the remarkable impact of entrepreneurs such as Bill Gates of Microsoft, Steve Jobs of Apple, Fred Smith of FedEx and others who took substantial risk to implement new ideas, directly and indirectly creating new economic sectors and millions of new jobs.

Entrepreneurship is much lower in Europe, suggesting that high tax rates and poorly designed regulation discourage new business creation. The Economist reports that between 1976 and 2007 only one continental European startup, Norway’s Renewable Energy Corporation, achieved a level of success comparable to that of Microsoft, Apple and other U.S. giants making the Financial Times Index of the world’s 500 largest companies.

Yet we continue to try to recreate Europe’s debacle here.

The economy now faces two serious risks: the risk of higher marginal tax rates that will depress the number of hours of work, and the risk of continuing policies such as Dodd-Frank, bailouts, and subsidies to specific industries and technologies that depress productivity growth by protecting inefficient producers and restricting the flow of resources to the most productive users.

If these two risks are realized, the U.S. will face a much more serious problem than a 2013 recession. It will face a permanent and growing decline in relative living standards.

These risks loom as the level of U.S. economic activity gradually moves closer to that of the 1930s, when for a decade during the Great Depression output per working-age person declined by nearly 25% relative to trend. The last two quarters of GDP growth—1.3% and 2.7%—have been below trend, which means the U.S. economy is continuing to sink relative to its historical trend.

But your political and financial lords and masters know best, don’t they?  Just ask them.  They continue down this road despite the fact the destination is in plain sight in Europe and it isn’t pretty.

Occam’s Razor states “entities should not be multiplied unnecessarily.” Said another way, the simplest explanation is usually the most likely explanation. In this case the simplest explanation is incompetence.  But is it really incompetence?  With the European example staring them right in the face it’s hard to believe anyone is that incompetent.  The conclusion to their policies have already been proven to be a disaster.

So one has to being to consider other possibilities when those who are pushing the policies seem oblivious to the obvious.

You have to begin to wonder if it is a problem of hubris.  I.e. “the only reason it hasn’t worked before is we weren’t in charge”.  We’ve seen that in any number of instances throughout history where discredited or obviously illogical ideological ideas were tried and they again failed.

Or you have to consider the words “by design”.  But then you’re stuck with trying to come up with a valid reason “why”.  Recreating Europe’s debacle, or Japans’s or, for heaven sake, our’s in the ’30s would seem to be something smart politicians would attempt to avoid.

But here we are.

Economic growth requires new ideas and new businesses, which in turn require a large group of talented young workers who are willing to take on the considerable risk of starting a business. This requires undoing the impediments that stand in the way of creating new economic activity—and increasing the after-tax returns to succeeding.

And yet, we see a government bent on erecting even more impediments via increased taxation, costly new laws and onerous regulation.

Isn’t it about time we demanded to know “why?”  More importantly, maybe we should ask whose side they’re on.

~McQ