This essay first appeared on the digital edition of the Claremont Review of Books.
March 6, 2016 by Dan Mitchell
Of the 4,000-plus columns I’ve produced since starting International Liberty in 2009, two of the most popular posts involve semi-amusing stories that highlight the failure of socialism, redistributionism, and collectivism.
“The Tax System Explained in Beer” is the third-most-viewed post of all time, and “Does Socialism Work? A Classroom Experiment” is the fourth-most-viewed post. At the risk of oversimplifying, I think these columns are popular because they succinctly capture why it’s very shortsighted and misguided to have an economic system that punishes success and rewards sloth.
For those who want details, I have dozens of columns about real-world socialist failure, looking at both the totalitarian version in places like Cuba, China, Venezuela, and North Korea, as well as the majoritarian version in nations such as France, Italy, and Greece.
And for those that want to get technical, I even have several columns explaining that the pure version of socialism involves government ownership of the means of production (government factories, state farms, etc), whereas the “democratic socialism” in Europe is actually best viewed as extreme versions of redistributionism (while the pervasive interventionism favored by the left actually is a form of fascism).
Yet notwithstanding the horrible track record of every version of socialism, we actually have a presidential candidate in America who actually calls himself a socialist. Though, as pointed out by my colleague Marian Tupy in The Atlantic, he’s more of a redistributionist than a socialist.
Socialism was an economic system where the means of production (e.g., factories), capital (i.e., banks), and agricultural land (i.e., farms) were owned by the state. …Sanders is not a typical socialist. Sure, he believes in a highly regulated and heavily taxed private enterprise, but he does not seem to want the state to own banks and make cars. …Senator Sanders is not a proponent of socialism, and that is a good thing, for true socialism, whenever and wherever it has been tried, ended in disaster.
Here’s an article about real socialism by Mark Perry that’s more than 20 years old, but its analysis is just as accurate today as it was in 1995.
Socialism is the Big Lie of the twentieth century. While it promised prosperity, equality, and security, it delivered poverty, misery, and tyranny. Equality was achieved only in the sense that everyone was equal in his or her misery. …Socialism does not work because it is not consistent with fundamental principles of human behavior. …it is a system that ignores incentives. …A centrally planned economy without market prices or profits, where property is owned by the state, is a system without an effective incentive mechanism to direct economic activity. By failing to emphasize incentives, socialism is a theory inconsistent with human nature and is therefore doomed to fail.
Ben Domenech, writing for Commentary, analyzes the current version of socialism, which – particularly in the (feeble) minds of young people – is simply more middle-class entitlements financed by high tax rates on evil rich people.
Sanders holds massive events populated by kids who think what he is preaching is very cool. …When did it become acceptable for Americans to back an avowed socialist? …For Americans today, the visible and unmistakable connection between socialism and totalitarianism has faded dramatically. …For America’s young, socialism’s definition isn’t to be found in the desperate, sad reality of peoples held captive by regimes that proudly declare themselves socialist. It’s more of a vague ideal… This makes it easier for someone like Sanders to say that socialism just means middle-class entitlements… It is…Barack Obama…that we have to thank for socialism’s rise in 2016. Republicans…have been describing President Obama’s domestic program as socialist… The takeaway for today’s younger voters seems to be: If everything Obama is trying to do is socialism, …then perhaps we need to go full socialist to actually get things done.
The final part of the excerpt is very insightful.
Heck, they don’t even understand the modern-day failure of socialism in Venezuela or North Korea.
To them, socialism is simply bigger government.
Which is very offensive to people who actually have suffered under socialism. Garry Kasparov, the chess champion turned Russian dissident, doesn’t mince words in his response to the Sanders crowd.
Let’s close with something amusing. Or at least ironic.
It’s the socialism version of this communism image.
And it’s something young people should think about because socialism fails every place it is tried. As Mark Perry explained, it’s grossly inconsistent with human nature.
That’s true whether we’re looking at the totalitarian version of the majoritarian version.
The latter version is preferable, of course, though the end result is still economic misery.
P.S. Here’s a very clever video that asks college kids whether they would like a socialist grading system. Unsurprisingly, they say no. Though the video was put together before Bernie Sanders attracted a cult-like following, so perhaps today’s students would answer differently.
P.P.S. Speaking of videos, I’m guessing this bit of satire won’t be very popular with Bernie’s supporters.
P.P.P.P.S. You can also use two cows to teach about socialism, as well as other theories.
February 15, 2016 by Dan Mitchell
This is a very strange political season. Some of the Senators running for the Republican presidential nomination are among the most principled advocates of smaller government in Washington.
Yet all of them have proposed tax plans that, while theoretically far better than the current system, have features that I find troublesome. Marco Rubio, for instance, leaves the top tax rate at 35 percent, seven-percentage points higher than when Ronald Reagan left town.
This has caused a kerfuffle in Washington, particularly among folks who normally are allies. To find common ground, the Heritage Foundation set up a panel to discuss this VAT controversy.
You can watch the entire hour-long program here, or you can just watch my portion below and learn why I want Senator Cruz to fix that part of his plan.
Allow me to elaborate on a couple of the points from my speech.
First, a good tax system is impossible in a nation with a big welfare state. If the public sector consumes 50 percent of economic output, that necessarily means very high marginal tax rates.
Second, all pro-growth tax reform plans tax income only one time, either when earned or when spent, which means those plans all are consumption-base taxes in the jargon of public finance economists. Which is also just another way of saying that these tax plans get rid of double taxation.
On this basis, a VAT is fine in theory. Moreover, it could even be good in reality (or, to be technical, far less destructive than the current system in reality) if all income taxes were totally abolished.
Third, since Cruz’s plan leave other taxes in place, I’m worried that future politicians would do exactly what happened in Europe – use the new revenue source to finance an expansion of the welfare state.
Proponents of the Cruz VAT correctly point out that the plan simultaneously will abolish both the corporate income and the payroll tax, which sort of addresses my concern.
But keep in mind this is only an acceptable swap if you think, 1) the plan will survive intact as it move through the legislative process, and 2) the VAT won’t raise more money than the taxes that are abolished.
I’m not sure either assumption is valid.
Last but not least, proponents of the Cruz VAT plan keep denying that the plan includes a VAT. If you recall from my remarks, I think this is silly. It is a VAT.
To bolster my argument, here’s what Alan Viard wrote for the American Enterprise Institute.
Cruz’s proposed VAT would have a 16 percent tax-inclusive rate, and Paul’s proposed VAT would have a 14.5 percent tax-inclusive rate. Both VATs would be administered through the subtraction method rather than the credit invoice method used by most countries with VATs. The use of the subtraction method would not alter the fundamental economic properties of the VAT. A VAT is equivalent to an employer payroll tax plus a business cash flow tax.
Let’s close by citing some very wise words from Professor Jeffrey Dorfman of the University of Georgia (Go Dawgs!). Here are the key parts of his column for Forbes.
Conservatives are worried about national consumption taxes for several reasons, principally: these taxes’ ability to raise large sums of revenue and the ease with which politicians can raise the rates. Because national consumption taxes are efficient and can be applied to a larger base than is typical of state and local sales taxes they can raise large sums of money. While liberals think this is a plus, conservatives are rightly wary of taxes that could supply government with more money. More importantly, conservatives are suspicious of the semi-hidden nature of consumption taxes and the ability to raise them incrementally.
The bottom line is that even if we decide to call the VAT by another name, it won’t alter the fact that some of us think it’s too risky to give politicians an additional revenue source.
January 21, 2016 by Dan Mitchell
Remember the cluster-you-know-what in New Orleans following Hurricane Katrina? Corrupt and incompetent politicians in both the city and at the state level acted passively, assuming that Uncle Sam somehow should be responsible for dealing with the storm.
And we’ve seen similar behavior from other state and local politicians before, during, and after other natural disasters.
The obvious lesson to be learned is that the federal government shouldn’t have any responsibility for dealing with natural disasters. All that does it create a wasteful layer of bureaucracy, while also inculcating a sense of learned helplessness on the part of state and local officials who should be responsible for dealing with storms and other local crises.
In other words, the answer is federalism. State and local governments should be solely responsible for state and local issues.
But not just because of some abstract principle. There’s a very strong practical argument that you get more sensible decisions when the public sector is limited (as Mark Steyn humorously explained) and there is clear responsibility and accountability at various levels of government.
And this is why the biggest lesson from the scandal of tainted water in Flint, Michigan, is that local politicians and bureaucrats should not be able to shift the blame either to the state or federal government. Which was my main point in this interview.
To be sure, it is outrageous that state and federal bureaucrats knew about the problem and didn’t make it public, so I surely don’t object to officials in Lansing and Washington getting fired.
But I do object to the political finger pointing, with Democrats trying to blame the Republican Governor and Republicans trying to blame the Democratic President.
Nope, the problem is an incompetent local government that failed to fulfill a core responsibility.
The Wall Street Journal has the same perspective, opining that the mess in Flint is a failure of government.
…the real Flint story is a cascade of government failure, including the Environmental Protection Agency.
More specifically (and as I noted in the interview), we have a local government that became a fiefdom for a self-serving bureaucracy that was more concerned with its privileged status than in providing core government services.
…after decades of misrule: More than 40% of residents live in poverty; the population has fallen by half since the 1960s to about 100,000. Bloated pensions and retiree health care gobble up about 33 cents of every dollar in the general fund.
And the WSJ editorial also castigated the state and federal bureaucrats that wrote memos rather than warning citizens.
MDEQ and the EPA were chatting about Flint’s system as early as February. MDEQ said it wanted to test the water more before deciding on corrosion controls, though it isn’t clear that federal law allows this. …the region’s top EPA official, political appointee Susan Hedman, responded… “When the report has been revised and fully vetted by EPA management, the findings and recommendations will be shared with the City and MDEQ and MDEQ will be responsible for following up with the City.” She also noted over email that it’s “a preliminary draft” and it’d be “premature to draw any conclusions.” The EPA did not notify the public.
The lesson is that adding state and federal bureaucracy impedes effective and competent local government.
The broader lesson is that ladling on layers of bureaucracy doesn’t result in better oversight and safety. It sometimes lets agencies shirk responsibility for the basic public services like clean water that government is responsible for providing.
Here’s the bottom line.
Federalism is about getting better government by creating clear lines of responsibility and accountability in an environment that allows state and local governments to learn from each other on best practices.
The current system blurs responsibility and accountability, by contrast, while also imposing needless expense and bureaucracy. And we get Katrina and Flint with this dysfunctional approach.
Governor Greg Abbott today delivered the keynote address at the Texas Public Policy Foundation’s Annual Policy Orientation where he unveiled his Texas Plan to restore the Rule of Law and return the Constitution to its intended purpose. In his plan, Governor Abbott offers nine constitutional amendments to rein in the federal government and restore the balance of power between the States and the United States. The Governor proposes achieving the constitutional amendments through a Convention Of States.
“The increasingly frequent departures from Constitutional principles are destroying the Rule of Law foundation on which this country was built,” said Governor Abbott. “We are succumbing to the caprice of man that our Founders fought to escape. The cure to these problems will not come from Washington D.C. Instead, the states must lead the way. To do that I am adding another item to the agenda next session. I want legislation authorizing Texas to join other states in calling for a Convention of States to fix the cracks in our Constitution.”
Governor Abbott went on to explain that dysfunction in Washington, D.C. stems largely from the federal government’s refusal to follow the Constitution. Congress routinely violates its enumerated powers, while taxing and spending its way from one financial crisis to another. The President exceeds his executive powers to impose heavy-handed regulations. And the Supreme Court imposes its policy views under the guise of judicial interpretation. Governor Abbott urged action by Texas – and other states – to restore the Rule of Law in America.
Governor Abbott offered the following constitutional amendments:
- Prohibit Congress from regulating activity that occurs wholly within one State.
- Require Congress to balance its budget.
- Prohibit administrative agencies—and the unelected bureaucrats that staff them—from creating federal law.
- Prohibit administrative agencies—and the unelected bureaucrats that staff them—from preempting state law.
- Allow a two-thirds majority of the States to override a U.S. Supreme Court decision.
- Require a seven-justice super-majority vote for U.S. Supreme Court decisions that invalidate a democratically enacted law.
- Restore the balance of power between the federal and state governments by limiting the former to the powers expressly delegated to it in the Constitution.
- Give state officials the power to sue in federal court when federal officials overstep their bounds.
- Allow a two-thirds majority of the States to override a federal law or regulation.
To view Governor Abbott’s full plan, click here.
January 5, 2016 by Dan Mitchell
When I compared the tax reform proposals of various 2016 presidential candidates last month, Ben Carson got the best grade by a slight margin.
Here’s some of what’s been reported in the Wall Street Journal.
Republican presidential candidate Ben Carson on Monday called for imposing a 14.9% flat tax rate on income, ending taxes on capital gains and dividends and abolishing the charitable deduction and all tax credits.
By the way, the reporter goofed. Carson is proposing to end double taxation of dividends and capital gains, but all income would be taxed. What the reporter should have explained is that capital and business income would be taxed only one time.
But I’m digressing. Let’s review some additional details.
Mr. Carson’s flat tax would apply only to income above 150% of the poverty level… In some respects, Mr. Carson’s plan is similar to those of the other candidates, all of whom want to lower tax rates… But he goes farther, particularly with his willingness to rip up parts of the tax system that have been in place for a century. …In addition to eliminating the charitable deduction and investment taxation, Mr. Carson would also repeal the estate tax, the mortgage-interest deduction, the state and local tax deduction, depreciation rules and the alternative minimum tax.
Carson has basically put forth a pure version of the plan first proposed by economists at Stanford University’s Hoover Institution.
Perhaps most important of all, Carson’s plan is a flat tax and just a flat tax. He doesn’t create any new taxes that could backfire in the future.
Unlike proposals advanced by other candidates, my tax plan does not compromise with special interests on deductions or waffle on tax shelters and loopholes. Nor does it falsely claim to be a flat tax while still deriving the bulk of its revenues through higher business flat taxes that amount to a European-style value-added tax (VAT). Adding a VAT on top of the income tax would not only impose an immense tax increase on the American people, but also become a burdensome drag on the U.S. economy.
I would have used different language, warning about the danger of a much-higher future fiscal burden because Washington would have both an income tax and a VAT, but the bottom line is that I like Carson’s plan because the worst outcome is that future politicians might eventually recreate the current income tax.
What I don’t like about the Paul and Cruz plans, by contrast, is that future politicians could much more easily turn America into France or Greece.
P.S. If you want to get hyper-technical, Carson’s plan may not be a pure flat tax because he would require a very small payment from everybody (akin to what Governor Bobby Jindal proposed). Though if the “de minimis” payment is a fixed amount (say $50 per adult) rather than a second rate (say 1% on the poor), then I certainly would argue it qualifies as being pure.
P.P.S. Carson still has a chance to move his overall grade to A or A+ if he makes the plan viable by proposing an equally detailed plan (presumably consisting of genuine entitlement reform and meaningful spending caps) to deal with the problem of excessive government spending.
January 2, 2016 by Dan Mitchell
There are many reasons why I’m not a big fan of the United Nations. Like other international bureaucracies, it supports statist policies (higher taxes, gun control, regulation, etc) that hinder economic development and limit human liberty by increasing the burden of government
Some people tell me that I shouldn’t be too critical because the U.N. also helps poor people with foreign aid. Indeed, the U.N. has a very active project to encourage rich nations to contribute 0.7 percent of their economic output to developing nations.
I generally respond to these (in some cases) well-meaning folks by explaining that there’s a big difference between good intentions and good results. If you examine the evidence, it turns out that redistribution from rich nations to poor nations is just as counterproductive as redistribution within a society.
An article in The Economist succinctly summarizes the issue. It starts with the rationale for foreign aid.
After the second world war, a new “development economics” came to dominate policymaking…, often at the urging of international institutions such as the World Bank. It argued that poor countries were victims of a vicious circle of poverty… The answer? Rich countries should provide the capital, in the form of foreign aid. …poor-country governments should plan their economies and…competition should be restricted through monopoly rights and barriers to foreign trade.
It then describes the revolutionary thinking of the late Peter Thomas Bauer, a Hungarian-born British economist who said the developing world needed economic freedom rather than handouts.
Lord Bauer set out alternative theories that, from the 1950s to the 1970s, were heresy. …Opportunities for private profit, not government plans, held the key to development. Governments had the limited though crucial role of protecting property rights, enforcing contracts, treating everybody equally before the law, minimising inflation and keeping taxes low.
Moreover, Bauer explained that foreign aid generally had a negative effect because it put resources in the hands of government, thus leveraging more statism. Which is the last thing these nations needed.
Aid politicised economies, directing money into the hands of governments rather than towards profitable business. Interest groups then fought to control this money rather than engage in productive activity. Aid increased the patronage and power of the recipient governments, which often pursued policies that stifled entrepreneurship and market forces. Indeed, aid had proved “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”
Writing for the U.K.-based Spectator, Daron Acemoglu and James Robinson explain that foreign aid has a very poor track record.
The idea that large donations can remedy poverty has dominated the theory of economic development — and the thinking in many international aid agencies and governments — since the 1950s. And how have the results been? Not so good, actually. Millions have moved out of abject poverty around the world over the past six decades, but that has had little to do with foreign aid. Rather, it is due to economic growth in countries in Asia which received little aid.
Meanwhile, the nations getting the most handouts have remained mired in poverty.
In the meantime, more than a quarter of the countries in sub-Saharan Africa are poorer now than in 1960 — with no sign that foreign aid, however substantive, will end poverty there. …huge aid flows appear to have done little to change the development trajectories of poor countries… Why? …economic institutions that systematically block the incentives and opportunities of poor people to make things better for themselves, their neighbours and their country. …The problem is that their aspirations are blocked today…by extractive institutions. The poor don’t pull themselves out of poverty, because the basic ability to do so is denied them.
What exactly are “extractive institutions”?
At the top of the list would be bad government policy, which creates a system in which politicians, bureaucrats, and insiders get unearned wealth via corruption and cronyism.
The authors give some powerful examples.
To understand Syria’s enduring poverty, you could do worse than start with the richest man in Syria, Rami Makhlouf. He is the cousin of President Bashar al-Assad and controls a series of government-created monopolies. He is an example of what are known in Syria as ‘abna al-sulta’, ‘sons of power’. To understand Angola’s endemic poverty, consider its richest woman, Isabel dos Santos, billionaire daughter of the long-serving president. …every major Angolan investment held by dos Santos stems either from taking a chunk of a company that wants to do business in the country or from a stroke of the president’s pen that cut her into the action.
I’d also include the wealthy Venezuelans who have used socialism as a vehicle to enrich themselves while impoverishing ordinary people.
To be sure, we have examples of insider favoritism and undeserved wealth in rich nations, but it’s a matter of degree. Cronyism is an undesirable feature of our economy, but it’s a defining feature of nations in the developing world.
So what does all this mean?
Acemoglu and Robinson basically reach the same conclusion as Lord Bauer.
When aid is given to governments that preside over extractive institutions, it can be at best irrelevant, at worst downright counter-productive. …Many kleptocratic dictators such as Congo’s Mobutu Sese Seko have been propped up by foreign aid.
Now let’s shift from looking at nations where failure has been subsidized by foreign aid and instead consider the success stories of economic development. Are there any lessons we can learn?
Well, if you look at the ranking from Economic Freedom of the World, you’ll see that the formerly poor East Asian jurisdictions that are now rich also have something else in common. They rank very high or somewhat high for economic freedom
In other words, there is a recipe for growth and prosperity. Nations that restrain the size of government and allow markets to flourish enjoy growth.
Which is exactly the message of this video.
By the way, you don’t need perfection to get climb out of poverty. China still doesn’t rank very high in Economic Freedom of the World, but it has improved its position over the past few decades and that has helped lift hundreds of millions of people out of abject poverty. Same with India.
Yes, both nations are capable of much stronger growth with further improvements in policy, but it’s nonetheless good news that there’s been considerable improvement.
Let’s address one more issue that arises in the debate about foreign aid.
Professor Noah Smith of Stony Brook University, in a column for Bloomberg, debunks the myth that poverty in the developing world is a legacy of colonialism.
…the stolen-wealth theory is wrong. Oh, it’s absolutely true that colonial powers stole natural resources from the lands they conquered. …the stolen-wealth theory is wrong…because the theory doesn’t explain the global distribution of income today. …The easiest way to see this is to observe all the rich countries that never had the chance to plunder colonies. Germany, Italy, Sweden, Denmark and Japan had colonial empires for only the very briefest of moments, and their greatest eras of development came before and after those colonial episodes. Switzerland, Finland, and Austria never had colonies. And South Korea, Taiwan, Singapore and Hong Kong were themselves colonies of other powers. Yet today they are very rich. They did it not by theft, but by working hard, being creative, and having good institutions.
Amen. And notice that he also mentions the tiger economies of East Asia.
P.S. Given what I wrote the other day about the statist proclivities of the OECD, here’s an item that shouldn’t surprise anyone.
Even though South Africa already has an excessive burden of government, the Paris-based bureaucracy wants that nation to impose even higher taxes to fund even bigger government.
I’m not joking. The OECD just put out a document entitled, “How can South Africa’s tax system meet revenue raising challenges?” and here are some blurbs from the abstract.
…considerable revenues will be needed in the years ahead to expand social spending and infrastructure in order to raise growth and well-being. …there is some scope to raise further revenue, particularly through broadening the base of these taxes further. …An important additional source of revenue is environmentally related taxes.
Yup, you read correctly. The bureaucrats at the OECD want people to believe that South Africa’s main challenge is that government isn’t big enough. Heck, they actually want readers to believe that a more bloated public sector will “raise growth and well-being”.
What’s especially remarkable about the OECD’s anti-empirical approach is that fiscal policy is where South Africa get its lowest score in Economic Freedom of the World. It’s almost as if the tax-loving bureaucrats at the OECD are trying to keep that country from prospering.
And we’re subsidizing this nonsense to the tune of about $100 million per year.