How to Destroy an Economy, Tip #37,865: Adopt Hillary’s Capital-Gains Tax Plan

Image: Shannon Stapleton/Reuters

(H/T Robert Wenzel)

Hillary’s Inconceivably Stupid Capital-Gains Tax Scheme

By Larry Kudlow

The weakest areas in the weakest recovery since World War II are investment in new plants and equipment and investment in new business startups. These are the biggest job-creators, and their slump is a key reason for the subpar labor recovery, with low participation rates and an increase in involuntarily part-time workers.

So if investment is the problem, what does Hillary Clinton go out and do? She proposes jacking up the tax on investment. It’s almost inconceivably stupid.

In her latest economic speech, Clinton proposes doubling the capital-gains tax rate on the profit made from asset sales (stocks, bonds, real estate) held a day less than one year up to two years. Right now, if you take a capital gain a day more than one year, you are taxed at a 20 percent rate. Actually, it’s 23.8 percent when you include the health-care surtax. So under Clinton’s brilliant new play, you’d be taxed at 43.4 percent — the top individual capital-gains rate of 39.6 percent plus the 3.8 percent Obamacare surtax.

That means instead of keeping 80 cents on the additional dollar of profit, you’d only keep 56.6 cents — a 30-percentage-point reduction in the take-home-pay reward for taking an extra dollar’s investment risk.

This will create a tall barrier to investment — what we don’t need. If you tax something more, you get less of it.

Clinton complains about too much “short-termism” in the economy. But her program might well create more of it. That’s because she has a sliding tax-rate scale, whereby assets held two to three years would be taxed at 39.8 percent and assets held three to four years at 35.8 percent. And you don’t get back to the statutory 20 percent capital-gains rate unless you hold an asset for six or more years.

Who’s going to lock themselves into that? What if new investment opportunities arise? Want to convert your current holding into cash so you can invest in your brother-in-law’s start-up? Maybe it’s the next Facebook. Who knows? The point is, the Clinton plan exacts a huge tax penalty on the movement from old capital to new.

The late Jude Wanniski called this re-oxygenating the economy. Ms. Clinton would snuff that out. Her short-termism fear will lock us into long-term economic stagnation.

By the way, the numbers are actually worse, because capital gains are already taxed as corporate profits. What investors pay is a double tax.

So let’s go back to Hillary’s top cap-gains rate of 43.8 percent. The government takes 35 percent of your profit in corporate taxes, leaving 65 cents to be taxed a second time as capital gains at the new 43.8 percent rate. That results in a take-home profit of 37 cents on the dollar.

Is that enough to reward the risk of investing in the next Uber? Except for Mayor Bill de Blasio, who hates Uber, most people would say no.

But that’s Hillary’s plan.

How powerful is the capital-gains tax? The nonpartisan Tax Foundation rates it among the top three economic-growth influences on the economy, along with full cash expensing for new investment in plants and equipment and the corporate tax. And compared with the rest of the world, the U.S. has fallen far behind in terms of this investment-tax-penalty grouping.

This is government tinkering at its worst. The reality is that Hillary Clinton is attempting to punish success and redistribute income.

Did someone say “tax the rich”? Clinton proposes an income threshold of $484,850 for married couples filing jointly. Oh, my gosh! Successful economic activists! Let’s get ’em!

Ironically, history shows that periods of higher capital-gains tax rates produce less revenue as a share of all federal revenue and as a fraction of GDP. Hillary’s not even redistributing efficiently.

And then there’s what some call the “Charlie Gibson effect.” Gibson interviewed then-Senator Obama in 2008 for ABC News. Obama said he’d raise the capital-gains tax from 15 percent to 28 percent. But Gibson reminded Obama that when Bill Clinton and George W. Bush lowered capital-gains tax rates, revenues actually increased. In other words, the Laffer curve. But Obama said it didn’t matter because he wanted to be “fair.”

It also doesn’t matter to Hillary Clinton. She wants to beat Bernie Sanders, or at least cuddle up to the Vermont socialist. What nonsense. Bad economics and bad politics. Voters will understand this.

Goofy ideas like this make me yearn for a 15 percent flat-tax rate on everything. Personal income, corporate profits, capital gains, dividends — everything. But that still leaves me with a double-tax problem for investment and savings. So it’s probably time to blow up the corporate-tax code altogether. That would get us to the 4-percent-plus growth path advocated by some of the Republicans on the campaign trail.

And that would get us some “long-termism” economic growth — just what the country yearns for.

Larry Kudlow is CNBC’s Senior Contributor and author of American Abundance: The New Economic & Moral Prosperity.

Tom Woods on the Economics of the Minimum Wage

With Los Angeles this week raising the minimum wage to $15 by 2020, and protesters at the McDonald’s headquarters demanding the same pay, the topic has been front and center over the past week. What many people seem to love to ignore are the potentially disastrous effects a minimum wage would impose on a population. Politicians and activists who advocate for one don’t put much thought into the fact that if a floor is mandated on the price of anything, including labor, demand for that will correspondingly decrease. Thomas E. Woods in August of 2013 wrote what is, in my opinion, one of the best analyses I have yet to read about this topic. It started in response to a meme displaying enough economic fallacy to deserve a more general treatment of the subject:

Who Needs Economics: Double Everyone’s Wages by Paying 17 Cents More!
by Tom Woods

That’s what this ridiculous graphic tells us:

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Even the Huffington Post refuted this one. The price increase would be much more substantial. (Though even here, HuffPo’s analysis is suspect. It doesn’t consider the effects of the price increases on the demand for the product: people would buy fewer burgers at the considerably higher prices, which means there would be less demand for fast-food workers’ labor.)

Incidentally, if you want to help poor people, why not just go ahead and do it? Why go the absurdly circuitous route of trying to make food more expensive (which in turn hurts other poor people)? Why not just seek out the working poor directly and help them? And why castigate the only institution in society that has lifted a finger to improve their material condition?

Answer: these people are all talk. They’d love to help everyone in the world, as long as someone else pays the price. These critics pay McDonald’s employees zero, but they are upset at McDonald’s, which gives them a paycheck. (Once again, I remind readers that the merits of fast food are not the issue here.)

A week or so ago I posted about how utterly wrongheaded the force-wages-up-by-wishful-thinking crowd is, and I explained how in fact wages rise. Click here for that post.

Let me add a few more thoughts to what I wrote at that link. Once wages are raised to $10 or $15 an hour, why would the critics stop? Isn’t it also tough to live on $10 or $15 an hour? Can’t we wish $50/hr wages into existence? And if we can do that, why not $100/hr?

The kind of thinking reflected in the graphic is that wage rates are really just arbitrary things, and that they can be increased without any real inconvenience to anyone. Plus, they say, it will help the economy (by stimulating consumption) if people get paid more, etc.

To give a sense of the problem with this latter claim, let’s be sports and set aside the disemployment effects of the wage increase. Let’s consider just the claim that spending more on consumer goods is what an economy needs. (So to be clear, we’re leaving out the point that higher wages don’t necessarily increase the overall spending of workers if fewer workers have jobs in the first place because the higher wages threw them out of work.)

So consider: if it’s “good for the economy” for unskilled labor to be given an arbitrary, coercively levied wage increase, would it also be good for the economy if employers quit shopping around for low prices for steel and just paid more for steel, so the steel manufacturers would have more money to spend on consumption? Would it be even better if they went out of their way to pay more for lumber than the going price? Then the lumber people would have more to spend. Would it be still better if employers paid extra for lumber, steel, labor — and everything else they needed? If it’s “good for the economy” for business firms to pay artificially high wages, why not demand that they pay artificially high prices for everything? Then the economy would be super!

You see the problem. The firm becomes less and less profitable, and less able to support employment, the more it needs to pay for inputs. And the more it pays for some inputs, the less it has on hand to pay for others. Extra money paid in wages over here means less spent on intermediate goods — and thus lower wages for other workers — over there. And the firm is less able to invest in capital equipment, which is what makes all of society wealthier.

A word, too, on the misplaced emphasis on consumption, as if that’s all an economy was about. If all we did was consume, and no one saved and productively expended any resources, the entire structure of production would grind to a halt. Just to maintain the structure of production involves saving enough to support the existing capital structure: all the stages and production processes from raw materials down to the finished product that constitute the intermediate stages of production that are left out of GDP. (For more on this, see my resource page on GDP.)

So if we were determined to “stimulate consumption,” we should be happy at the following outcome. Suppose we have a lucky person (lucky because the doubling of his wages at McDonald’s did not force him out of a job through layoffs or through the suddenly hastened automation of his job, or did not force him to do extra work, or did not take away his fringe benefits, etc). This lucky person takes some of his extra pay and buys five gallons of milk. The milk seller takes the money he earns from this sale and buys a new shirt. The shirt seller takes the money from selling the shirt and buys a few gallons of gas. And so on. All consumption. Nothing is saved or productively expended.

This means: no wages are paid (since making payroll is not consumption), no business-related bills are paid (again, not consumption), no intermediate goods are ordered by later-stage production (again, not consumption), etc. The result of all this spending: inventories of consumer goods would dwindle, and, the gross saving necessary to keep the production structure up and running not having occurred, the productive capacity of the economy would collapse. There’s your utopia of consumption.

Obviously, then, “the economy” is more than just money passing from hand to hand in exchange for consumer goods. To say that “consumption” needs artificial stimulus is a morally and economically arbitrary value judgment. Only the voluntary decisions of all market actors, based on their own preferences and coupled with a market price system, can give rise to a structure of production that balances our desires to consume with the enormously complex latticework of capital and stages of production that make our preferred level of consumption possible.

One more thing: we are faced with impossible obstacles anytime we think in terms of a “fair wage” that differs from the wage that emerges on the market.

Consider: economist George Stigler noted decades ago that in order to meet the nutritional standards of the U.S. government in 1943 least expensively, a man of 154 pounds could consume, in a year, 370 pounds of wheat flour, 57 cans of evaporated milk, 111 pounds of cabbage, 23 pounds of spinach, and 285 pounds of dried navy beans.

For a wage to be “fair,” would it have to allow only this for food? What kind of variety would be “fair”? Are movie rentals part of “fair” compensation? If so, how many per month? How many cigarettes are “fair”?

This is ridiculous. If you want wages to rise, abandon the juvenile insistence that protests and demands make economic sense. This is how wages rise.

Originally posted at TomWoods.com

The Root Causes of Police Brutality

News stories abound on the national press about cases of police officers killing unarmed citizens, with media focus on white officers killing black men, leading to marches and protests in cities across the country with the purpose of fighting a system whose injustices stem from “institutionalized racism.” But is racism the cause of these killings, if they are unjustified in the first place? Is it inequality? Or is there a more fundamental reason? Are inefficiencies a result of “soft on crime” policies? Or is that missing the point entirely? As we’ll see below, the problem is much more elementary and structural than what’s diagnosed in media discussions. The real cause has little, if anything to do with the problems mentioned above, and has everything to do with an unaccountable, state-granted monopoly on the provision of protection services that is above the law.

In a Mises Daily article titled “Law Enforcement Socialism,” Anthony Gregory writes about the fundamental problems that lead to police inefficiencies, lack of accountability, and cases of brutality. He notes that the reasons government law enforcement agencies fail to achieve their stated goals are the same reasons many people reject any notion of government control of the means of production in most industries today. Whenever a government monopolizes the provision of a good or service, we see the same characteristics typical of any monopoly: namely, inefficient use of resources, unaccountability, high prices, poor-quality service, and a virtually unlimited source of income such as tax revenue. This is the inevitable result of an agency providing a good or service without having to worry about competition and hence losing their customers, especially when their funds are coercively obtained, as is the case with government. The state has no incentive to give to its “customers” a superior service because no competitors are allowed, and the “customers” must pay for the service regardless, to avoid being thrown in jail or even killed, were they to defend themselves from such aggression. In effect, what we’re left with is an agency that is above the law without regard for any consequences if it breaks any of the same laws it enforces on its subjects. That’s a situation that surely leads to all types of other problems, including harassment, theft, even murder.

Gregory goes on to explain why the free market system is superior in providing services such as police protection, and why the same incentives that allow privately run industries to prosper are the same incentives that exist to foster an environment for higher-quality, lower-cost protection services:

Law Enforcement Socialism

by Anthony Gregory

Every year, more prisons are built, more money is funneled to police departments, more criminal law is written and yet domestic crime remains a major problem.

Explanations abound as to why this is. The Left blames the economic system for fostering inequality, which supposedly causes crime. The Right says the police have their hands tied by political correctness. Libertarians typically argue that the government wastes precious time and resources on victimless crime and has insufficient tools remaining to deal with the genuine predators.

There is a more fundamental explanation, however, which makes logic out of the entire mess but is almost never voiced: Socialism. Law enforcement agencies, courts, prisons, legislative bodies — all of the key institutions that are supposed to produce justice are owned and maintained by the state.

Outside of some small academic and activist circles, most Americans reject the radical ideology of socialism as it pertains to the economy as a whole. Hardly anyone believes that the state should maintain the means of production and that private enterprise should be abolished. Most people understand the folly of divorcing all industry from private property ownership and running an economic sector completely through central management.

It is interesting, then, that most people still believe in total socialism when in comes to providing services of security and justice.

There is a considerable literature exploring how the market might handle law, but rarely are people exposed to it. Murray Rothbard, Bruce Benson, David Friedman, Robert Murphy, Samuel Konkin and others have made insightful contributions to such theory. However, we do not need to know how exactly the market would deal with this to know that socialism has institutional limitations that prevent it from achieving its advertised goals; and there is no reason not to apply this understanding to the question of law enforcement.

Just as when the means of production of any good or service are monopolized by the state, the result is havoc, we see similar problems when the state owns the means of production of the service of protecting the innocent and going after the guilty.

Mises identified the inability to engage in economic calculation as the key practical limitation of socialism that rendered it unworkable. This incapacity to divert resources to their most urgent use is one of the most conspicuous results of a socialist criminal justice system. Thus do we see police expending hundreds of thousands of dollars arresting, prosecuting, and punishing an individual for a victimless crime, when it is hard to imagine a private institution finding such a witch hunt economically viable.

The state, unlike a participant in the free market, gains its market share and resources through violence. The more it spends, the more it expands and the more it is able to spend. It sees spending money not as a cost to be balanced against income it brings in. Rather, the state’s resources are not its own and its very success as an institution is determined largely by how much it spends. It is eager to spend money, to expand its operations and to reward its privileged class of individuals with jobs and other benefits.

Whatever it has spent, it has already effectively extracted from the productive sector, for it has already redirected resources in the economy. The state is not leery of debt, since it’s not responsible for its own solubility; instead, one way or another, it burdens the taxpayer with its spending habits.

The state has every incentive to expand its activity into nearly any area that the people will tolerate, regardless of whether such activity makes economic or moral sense. Since it monopolizes conflict resolution — and acting in this capacity is another opportunity to expand its size and reach — the state actually has an interest in fomenting conflict, thereby maximizing its role in society. The more crime and punishment, no matter their effect on the innocent, and the more laws, no matter how outrageous or contradictory, the more business for the state, which, in a supreme conflict of interest, gets to determine what the laws are.

The state consequently attacks a thousand kinds of behavior that a market law enforcer would likely never dream of going after, since doing so would be unprofitable on the free market. Market institutions, unlike the state, could and would weigh costs and benefits and profits and loss and make careful decisions about using scarce resources. When customers actually have to pay on an individual basis for their security, they are far less likely to want their rights protector to go around waging expensive, unwinnable wars on vice and impropriety.

Under a free market, property rights would be liberated from their greatest nemesis — the constant encroachment of the state — and so people would have the means to better protect their own values within the context of private property and free association. But they likely wouldn’t want to spend thousands of dollars a year to have their hired rights protector hunt down and lock peaceful people in jail for drugs or prostitution.

Moreover, without the state monopoly, it would be nearly impossible to get all judicial and law enforcement bodies to agree that such peaceful people should no longer be seen as potential customers, but rather as targets of their violence. Violence, after all, is expensive.

Under law-enforcement socialism, on the other hand, market disincentives against such waste and counterproductive endeavors are discarded. Public choice theorists should especially expect state involvement in law enforcement to foster incentives for logrolling — in this case, for ever more laws and law-enforcement spending that most people would probably not elect to pay for on an individual basis, but that certain powerful economic and ideological interests willingly lobby hard to secure at other people’s expense.

The socialization of the cost of law enforcement, just as with any other industry, has led to shortages and shoddy products. In this case, it is justice that is shoddy and in short supply. We get a war on drugs that has imprisoned millions and squandered billions and encouraged homicide and corruption. We get a policy of disarming the civilian population of private weapons, which deter crime far more effectively than government police do. We get a prison system in which innocent and guilty are locked together to be beaten, raped, tortured, shot, and ruled by sadistic prison guards and the worst of the  inmates.

We get a standing army of crime-prevention agents with militarized weaponry, sovereign immunity to shoot to kill, and the arbitrary power to stop practically anyone at any time and destroy his life. None of this actually reduces crime overall, and none of it makes the victims of crime whole. It only victimizes them further by forcing them to foot the bill and endure the police state’s tyranny along with everyone else.

This shouldn’t surprise those who understand the failings of socialism. Socialism in any sector will misallocate resources. When we’re talking not just about redistributing money, but the enterprise of administering legal coercion and violence, the miscalculations inherent in socialist central planning translate into grand violations of millions of people’s rights.

Just as those who advocate socialism for public schools, or for health care, or for the economy generally, tend to argue that under a free market, there will be at least two classes of people — the exploited who can’t afford to meet their human needs and the predatory exploiters who get fat off the system — defenders of law-enforcement socialism argue that there would be chaos and class conflict without state provision of law and order. Without a monopoly provider, some people won’t be able to afford services of rights protection and some will disregard the rights of others and will unleash their criminality on society, whether as individuals in a chaotic and violent anarchy, or as gangs. Under a free market in law enforcement, the justice agencies themselves, we are told, will also likely become criminal.

But this is what we have now, under state law enforcement — the results of the state itself enjoying a class distinction of the most fundamental type. There are those who have to follow the law — created, enforced, and judicially presided over by the state — and those who use and depend on aggression as a matter of their job description: agents of the state. The state, by its nature, can categorically do things to people that the people cannot legally do to each other. It can seize wealth, instigate detentions and invasive interrogations and searches of the innocent, and issue systematic coercion with itself as its only institutional oversight.

Those who wish to improve the state’s handling of law and order by petitioning it to repeal some of its laws and redirect its focus should be commended to the degree that they challenge grave injustices by the state, but most reformers ignore the crucial problem — socialism in the area of law and rights protection. A reform that leaves the state intact as a monopoly on criminal justice will be as limited as any reform of education that allows the state to continue its near-complete ownership of the schools.

In practice, law-enforcement socialism is even worse than socialism in most other areas, since it involves a state monopoly on legal violence, and thus is expected to act coercively. Whenever an innocent person is brutalized — which will happen about as often as we could expect any kind of mistake from government work — it is seen as a small price to pay to protect the innocent.

As terrible as it is to allow central planners to decide how and where to produce shoes, cars, or widgets and where to divert them, it is a bigger problem when central planners are given free rein to decide how force is to be used in all of society. Indeed, by capitulating to its monopoly on violence, we accept its very power to monopolize and socialize. Freedom is never secure so long as a ruling class of people is permitted to monopolize the very means of monopolization, from which further abuses of the market and liberty can only follow.

Yet far from seeing the inevitability of the failure of law-enforcement socialism to deliver the goods nearly as efficiently or humanely as the market would, most libertarians, conservatives, and left-liberals continue to assume that law-enforcement socialism is the most essential kind for human progress.

Now, those who desire socialism in any other area must logically support it in the realm of coercive conflict resolution, since the state’s power to monopolize any sector depends on its monopoly on legitimized violence. But what of “free-market” conservatives who  believe not in markets, but rather socialism, in the field of criminal justice? Perversely, “free-market” types are frequently among the greatest defenders of law-enforcement socialism, quick to suggest that it would function fine if only it had more resources, or if the right people were in charge, or if the bureaus had more power, or if only the left-liberals would stop obstructing it with quaint constitutional and statutory limits on its power. Paradoxically, it is often those who most loudly cheer on capitalism who  are most enthusiastic about the state’s maintenance of law and order. When it comes to battling evildoers — which conservatives claim to want more strongly than the liberal Left — there is nearly total faith in the theoretical and practical capacity of socialism to work.

The most notable contradiction is seen in libertarians who adopt law-enforcement socialism. The error made by many libertarians is in thinking that since rights should always be respected, the state should be in charge of ensuring this social goal. When the progressives claim to want decent healthcare for everyone, some libertarians will point out that if this were really the case, the leftists would embrace a free market in medicine. Yet many libertarians, who claim to want justice for everyone, do not embrace the market when it comes to providing justice.

In some ways, the pro-state libertarian is more inconsistent than the left-liberal who concedes his willingness to use the state to achieve his social designs. Favoring centralized aggression to achieve the libertarian goal of a world without aggression is more of a contradiction. It is inconsistent to tell someone, “You have no right to use the state to tax me to create social programs,” if you yourself would use the state to tax others to affirm an absolutist libertarian sense of justice.

Protecting rights is crucial, which is why a monopoly on aggression is the last institution to trust with such an important task. The state claims to protect us with its military and police, but this is at least as much a sham as the state’s protection of us from poisoned pharmaceuticals, tainted spinach, disease, illiteracy, or ignorance. Sure, sometimes a police officer does the right thing — and sometimes, even often, a public school teacher successfully instructs pupils on the multiplication tables or how to diagram a sentence.

But these individual accomplishments would be multiplied and much more encouraged if the market prevailed. Overall, the state is detrimental to both law and education. The Department of Justice brings as few victims justice as the Department of Education teaches students.

Furthermore, while official schooling and official law are both monopolized by the state, education and justice are actually served predominantly by civil society, by family, community, private property, voluntary initiative, commerce and the natural law tradition. Just as in the Soviet Union a disproportionate amount of the food was grown on small lots of privately owned land outside of the socialist farms, so in America most of law and order result from private property and its protection by private individuals and civil culture, outside of the socialist law enforcement establishment. It is no wonder then that the more expansive the state is in law enforcement, the more money it spends, and the more  people in jails, the less safe are our streets.

When a welfare state worker gets it wrong, it is a waste of resources and can create waves of disastrous social repercussions. When a law enforcer gets it wrong — or searches and seizes the innocent in pursuit of the guilty — justice itself has been defiled and liberty attacked.

The spontaneous order of voluntarily acting individuals has given us everything in society that we take for granted. Whenever such free order is suppressed, disorder follows. That’s why we should not be surprised that the criminal justice system is one of the saddest features of our society. In the relatively capitalistic United States, the justice system is pure socialism. Only by getting the government out of the way and letting individuals act voluntarily and cooperatively can we expect the administration of justice to be  as effective and moral as the other sectors where the market, and not the state, dominates.

“Law Enforcement Socialism” originally appeared at the Mises Institute.