Many Americans Don’t Pay Income Taxes

PoorTaxHere’s an interesting article from the National Taxpayers Union, based on IRS data, showing that well over a third of people who file income tax returns have no tax liability, or a negative tax liability.

In 1985, in the middle of the Reagan years, less than 20% of income tax returns showed no tax liability, whereas in 2010, during the Great Recession, more than 40% of tax returns came from filers who owed nothing. The most recent data, from 2012, shows that 35.8% of returns were filed by people who had no liability.

One reason, in addition to complying with tax law, for someone with no tax liability to file a return is that many taxpayers receive refundable tax credits, such as the Earned Income Tax Credit and Additional Child Tax Credit, so that many people not only don’t pay income taxes, they actually get money back from the tax system. Refundable tax credits run about $100 billion a year.

Meanwhile, in 2011 the top 10% of income earners paid 68% of all income taxes. I’ve seen libertarians argue both for and against tax systems in which many people pay no taxes, and the bulk of taxes are paid by a few.

One argument is that when when most voters pay little or no taxes, government has a tendency to grow too big as most people support more government programs for them, paid for by others.

Another argument is that taxation is undesirable (maybe immoral, if taxation is theft), so any time taxes can be reduced or eliminated for anyone, that’s a good outcome.

What do you think? Is the fact that well over a third of those who file income tax returns owe no taxes desirable, or undesirable?

California’s Proposed $2 per Pack Excise Tax on Cigarettes

cigarette_sales_dollar_sign_cigaretteA bill introduced for consideration in an upcoming special session of California’s legislature proposes to add an excise tax of $2 per pack to existing state and federal excise taxes on cigarettes. Proponents estimate that the new tax (levied on distributors) will raise $1.5 billion to help pay the healthcare costs incurred by low-income Californians.

Dream on!

The so-called Save Lives California, a special-interest group whose members include the California Medical Assn., the American Cancer Society, the American Lung Assn. and the Service Employees International Union (SEIU), the last of which hardly represents disinterested publicly spirited bystanders, apparently are ignorant of the principles of public finance.

By imposing a $2 tax per pack tax on California’s cigarette distributors, its proponents seem to think that companies doing business at that (assumed) well-heeled link in the supply chain actually will bear the tax’s burden. But that conclusion is wrong as a matter of economic theory, which teaches that the burden of any tax is independent of the party required by law to remit tax receipts to the government’s coffers. Taxes rarely stick where they first land. Some of the tax burden is shifted forward to retailers (and their customers); some of it is shifted further up the supply chain, including onto the shoulders of employees and other input suppliers.

Berkeley’s selective excise tax of one cent per ounce on the distributors of sugar-sweetened beverages (SSBs) supplies a cautionary real-world example of that point. Only about 22 percent – not 100 percent – of that tax increase was passed forward to consumers in the form of higher retail prices. Why? Because consumers could buy SSBs beyond Berkley’s city limits, switch to un-taxed diet soft drinks, or take advantage of caffeinated substitutes, such as black coffee or unsweetened tea.

While it is true that few un-taxed alternatives to cigarettes are available to smokers, an observation that explains why the proposed tax bill includes electronic cigarettes in the tax base, it also is true that a high tax rate on any good or service supplies incentives leading to the emergence of illegal or underground markets for the taxable item. New York City imposes the nation’s highest selective tax rate on cigarettes. Nearly two-thirds of the cigarettes consumed there either display tax stamps from lower-tax jurisdictions like Virginia or carry no tax stamps at all. Cross-border shopping and smuggling become more enticing the higher is the tax rate.

Cigarette consumption has been declining steadily in the United States since the early 1960s, when the Surgeon General first published medical evidence linking smoking to lung disease. As a matter of fact, cigarettes have been called “coffin nails” since the late 19th century. Revenues generated by the federal excise tax are falling. So, if California’s government thinks it is preventing tobacco-related healthcare issues, its policy proposal is anachronistic at best.

The most likely outcome of California’s tax proposal is that cigarette tax revenue will remain flat or begin to slide. So, what will be the next target of California’s seemingly insatiable demand for additional receipts for financing its expansive spending programs? I leave answers to that question to the creativity of interest groups who will bring pressure to bear on their political representatives.

When Government Fails—Venezuela Edition

TolietPaperWhenever Venezuela comes up in the news the story is rarely good. From massive civil unrest, to rampant shortages, to hyper-inflation, to stories of squatters, the country is probably not on the top of many people’s “places I’d like to visit” list.

While we may look at the situation in Venezuela and think, “wow, living there would be awful,” the fact of the matter is that these conditions are reality for more than 30 million people who call the country home.

Some people look at the conditions in Venezuela and point to oil prices as the source of many of its problems. The Venezuelan government, led by President Nicolás Maduro, blames opposition leaders for the nation’s many issues. (He also blames Spiderman. No, really. You can read about it here.)

But the villain in this situation is obvious to anyone with an understanding of basic economics. The maleficent actor here is the Venezuelan government. Who is responsible for inflation? The government, who is printing money so fast that inflation has reached triple digits. Who is responsible for the squatters (and as a result, the shortage of rental housing)? As I discussed in a previous post, it’s the government, who fails to protect even the most basic private property rights. Who are the protestors rallying against? The government.

The shortages are also the responsibility of the Venezuelan government. In an effort to control commodity prices, the government has put a cap on the price retailers can charge for particular products. While such prices may be attractive to consumers, they are too low for producers to earn a profit. This causes many would be suppliers to drop out of the market. The end result is surging demand and less supply.

The losers in all of this are the people of Venezuela. With the money in their hands constantly losing its value and a lack of basic goods, they are forced to wait in unfathomably long lines to get basic necessities. Even here the government is interfering. People are only allowed to get in the queues for food on certain days, as dictated by the last few digits on their ID cards. Once in line, people mark their wrists with their number in line in an attempt to avoid arguments over position.

People can’t find enough toilet paper. Women were shocked in July to find that the price of tampons and other sanitary supplies jumped 1,800%. This price increase meant that the average Venezuelan woman would need to spend a third of her monthly wages on feminine care products. After two days of backlash, the government ordered the products be removed from store shelves.

This is not to mention an increase in crime as a result of the shortages and ultimately higher prices of even the most basic goods. Black markets now provide a variety of goods to desperate customers. According to one source, the difference between the market price and the “official” price set by the government is more than 560% for many goods. If someone wants to buy meat or poultry, they better be prepared to fork over 1000% more than what they would have to pay in a free market.

Venezuela is but one of many cases where we see the consequences of bad ideas, bad policies, and unconstrained government. It’s important to recognize that, while we see the shortages, sky-high prices, and black markets as a problem of “other countries,” our own government engages in many of the same activities. Minimum wages, rent controls, other price manipulations, and the printing of mass quantities of money generate the same kinds of consequences in the U.S. as they do in Venezuela or elsewhere. The difference is one of degree, not of kind.

The Mountain of Legal Injustice in the USA

TenThousandCommandmentsIn view of the thousands of laws in the USA for whose violation people are punished even though no identifiable person has been harmed by their actions, is it not wholly appropriate to say that those who are punished are in fact being punished for political crimes?

For example, persons entering or leaving the USA must file a declaration of the exact amount of cash and negotiable monetary instruments they are carrying if they have more than $10,000, notwithstanding that the money is their own. Here are the penalties for failure to file an accurate report as stated on FinCEN Form 105:

PENALTIES: Civil and criminal penalties, including under certain circumstances a
fine of not more than $500,000 and Imprisonment of not more than ten years, are
provided for failure to file a report, filing a report containing a material omission or
misstatement, or filing a false or fraudulent report. In addition, the currency or
monetary instrument may be subject to seizure and forfeiture. See 31 U.S.C.5321
and 31 CFR 1010.820; 31 U.S.C. 5322 and 31 CFR 1010.840; 31 U.S.C. 5317 and
31 CFR 1010.830, and U.S.C. 5332.

Think about this. For the “crime” of carrying, say, $20,000 of my own money into or out of the USA without accurately reporting it, the government may legally take the money, fine me $500,000, and put me in a steel cage for 10 years. Think about it. Are such reporting requirements in themselves not an outrageous invasion of one’s privacy and peaceful personal affairs? And are not the absurdly severe penalties for mere failure to make an accurate report the stuff of nightmares?

If you think about this law, which is but a single example among thousands that might be given, and you suppose that it is the kind of law that ought to be enforced in a free society, may God have mercy on your erring soul. The USA has become a legal nightmare of perfectly legal injustice, and aside from the lawyers, who thrive on this vast body of injustices, hardly anyone has an inkling of just how enormous and pervasive it really is.

Yet every day, millions of Americans are thinking, there ought to be a law . . . .

Health Spending Slows to a Less Alarming Pace

a_better_choice_1800x2700Last week’s second estimate of Gross Domestic Product for the second quarter confirms that growth in health spending took a welcome break. Unfortunately, it is not a clear break in the trend of health spending consuming an increasing share of our national income.

The second estimate revised the advanced estimate, and the update was positive news on the surface: Seasonally adjusted, annual GDP in the second quarter was almost $17,902 billion. This was an upward revision of one-third of one percent from the advanced estimate. Also, spending on health services was revised down a little, to $2,045 billion. The increase in health spending from the first quarter was $21 billion, only 8 percent of the $253 billion growth in GDP in the same period.

However, when we compare 2015 Q2 to 2014 Q2 annualized spending, health care is still consuming a slightly disproportionate share of GDP. Health spending grew $106 billion, comprising 17 percent of the $632 billion change in GDP. GDP only grew 3.66 percent, while health spending grew 5.47 percent.

Technical note: When I discuss health services in these quarterly GDP releases, I mean only health services. I do not include purchases of medical equipment, or facilities construction. While I include Medicare and Medicaid, I do not include Veterans Health Administration or other government benefits. So, these dollar figures undercount the amount of our economy consumed by the government-health complex.

(See: Measuring the Economy: A Primer on the GDP and the National Income and Product Accounts, Bureau of Economic Analysis, October 2014, pages 5-2 and 5-3; Micah B. Hartman, et al., “A Reconciliation of Health Care Expenditures in the National Health Expenditures Accounts and in Gross Domestic Product,” Research Spotlight, Survey of Current Business, September 2010, pages 42-52.)

The Government’s Tax on Peace of Mind

Schindlers_list_red_dressIn the USA, thousands of distinct actions that violate no one’s natural rights have been declared illegal. Often the law provides for draconian punishment of those who violate such unjust laws. Sometimes, especially in cases involving alleged violation of tax laws or drug laws, the government may seize an alleged violator’s assets, making it impossible for him to mount an effective defense, conduct a business, or even live a normal life. In this perverse legal environment, ordinary people know, unless they are especially dense and ignorant, that the law’s hammer may fall on them at any time, regardless of how scrupulously they have conducted themselves and their affairs.

In such circumstances, most people experience a certain amount of apprehension, and many live in stark fear that the government may at any time ruin their lives. So, just as the government diminishes people’s well-being by taking their money in the guise of taxes, fees, and fines, so it equally or perhaps even more greatly diminishes their well-being by generating a pervasive apprehension or fear in their minds. We can all recall accounts of how people languishing under Communist dictatorships lived in fear of the “midnight knock on the door.” But a political and legal regime need not be Communist to have a similar effect on people’s peace of mind.

There is a loss of well-being as a result of pecuniary taxes and other takings, and there is similar loss of well-being as a result of merely living in a society where “justice” is a joke and the authorities act arbitrarily and capriciously to a great extent. People in the USA today live in such a depraved legal environment. Their quality of life suffers even if the law’s hammer never actually falls on them. One never knows when he has been or might soon be placed in the government’s cross-hairs. So far as the logic of the situation is concerned, I can’t help but think of the concentration camp in the film Schindler’s List, whose commandant used the Jews confined there for target practice.

Obama Is Half Right about Katrina


The Salvation Army and other private responders were denied entry into New Orleans for days following Katrina.

Speaking in New Orleans on the tenth anniversary of Hurricane Katrina, President Obama declared:

What started out as a natural disaster became a man-made one—a failure of government to look out for its own citizens.

He then, typically, dissembled the argument, pointing to a mish-mash of “economic inequality ... a country that tolerated poverty.”

He should have stopped while he was ahead: Yes, Mr. President, the devastation of Hurricane Katrina was a failure of government—but it was the result of the active failure of government, not some vague, passive failure of omission.


Safe, Legal, and Rare, Part 2: Legal?

ChoiceForty years following Roe v. Wade, we have been taking a look at how reality accords with the promised outcome of the ruling that abortion would become “safe, legal, and rare.”

Last time, we looked at “Safe.” Today, let’s look at “Legal.”

First, definitions. Legal can mean either “according to the laws of man,” or “according with the natural, moral law.” As we all know, “the law” as written by man only rarely coincides with what we term the “natural, moral law”—that is, a strict adherence to inalienable rights. The standard example given of the two diverging badly is slavery, which was certainly “legal,” but also certainly an egregious violation of the natural, moral law. Examples of laws currently on the books that violate our inalienable rights are too numerous to list.

So let’s start with the question of whether abortion as practiced today is “legal” as in “according to the law.”

Virtually all arguments around abortion involve consideration of when life begins. The Roe v. Wade ruling attempted to balance a right to abortion against the protection of potential human life, by affirming the state’s right to regulate abortion in the third trimester. Subsequent medical advances and evidence that a fetus is human earlier than the third trimester resulted in the Supreme Court replacing the “third trimester” guideline with “viability” in its Planned Parenthood of Southeastern Pennsylvania v. Casey ruling. Ironically, the result in many states has been that the previous prohibition against third trimester abortion has been dropped, with “viability” left to interpretation by abortion providers.


Follow the Silk Road

9106979_SStretching some 4,000 miles, the “Silk Road” was a trade network connecting the continent of Asia. From around 200 B.C., the route, running from China to India, to the Mediterranean Sea, the horn of Africa, and beyond, is largely credited for opening up trade in much of the world, leading to the development and exchange of everything from spices and cloth, to religions and political philosophies.

In 2011, a new Silk Road sought to once again bridge the gap between buyers and sellers. Instead of exchanging cloth, however, this Silk Road was best known for allowing individuals to buy and sell illegal drugs.

Known as part of the “dark web,” the Silk Road website allowed users to anonymously buy and sell goods and services without government intrusion. Using the anonymizing software, TOR, the site effectively obscured the online identities of both buyers and sellers, meaning that even the authorities would be unable to identify Silk Road users. The site accepted no electronic forms of payment other than Bitcoin, meaning users could not be traced via their credit card information. By March 2013, the site had some 10,000 products available for purchase and oversaw more than $1.7 million in transactions a month. Approximately 70 percent of these sales were for illicit drugs.


In Memoriam: Nathan Rosenberg (1927-2015)

NathanRosenbergI have just received the sad news that Nathan Rosenberg has died. Nate was an outstanding economic historian, and in my early years in the profession I viewed him as the very model of the kind of economic historian I wanted to become. He reviewed many of my early papers before their publication, and when the publisher was looking for a reviewer of the manuscript that became my first book (published in 1971), I suggested Nate as the reviewer, and he did excellent work in advising me about revisions of my manuscript.

In later years I kept in touch with Nate, though less frequently as the years went by and our career paths diverged. When David J. Theroux and I were creating The Independent Review in 1995, I asked Nate to serve on the journal’s board of advisers, and he did so from then on. Nate had many lovely stories to tell in addition to the scholarly information he shared with so many of us. I recall his telling me once about how as a boy he delivered the Yiddish newspaper, Morgen Freiheit, in New Jersey.

James Poterba has written the following notice of Nate’s passing.

I write with the sad news that Nathan Rosenberg, a pioneer in the study of the economics of technological change who also served as Stanford University’s representative on the NBER Board of Directors from 1980 until 2010, passed away on Monday at the age of 87.

Nate received his undergraduate degree from Rutgers, and his Ph.D. from the University of Wisconsin. He began his academic career at Indiana University, and served as a faculty member at the University of Pennsylvania, Purdue, Harvard, and the University of Wisconsin before moving to Stanford in 1974. Nate was the Fairleigh S. Dickinson, Jr. Professor of Public Policy, Emeritus, at Stanford, and an NBER board member emeritus, at the time of his death.

Nate’s research was primarily concerned with the economics of innovation, and he drew on historical as well as contemporary evidence to illuminate the economic forces that influence the rate of technical progress. His work had a powerful impact on both the micro-economic and macro-economic understanding of the role of innovation in economic growth, as well as on the recognition of the impact of institutions and policy in shaping the innovation process. His contributions were widely celebrated. When the Society of the History of Technology awarded him the Leonardo da Vinci Medal, the citation described him as having ‘almost single-handedly changed the way economists and economic historians think about technology and the nature of economic change.

We have lost a great scholar and friend; he will be deeply missed.