Political Perspective

"The facts are unmistakably plain, for those who bother to check the facts." – Thomas Sowell

Sorry, Ezra Klein: The ‘one tax graph you need to know’ needs more context

Sorry, Ezra Klein: The ‘one tax graph you need to know’ needs more context

By Michael Strain and Stan Veuger @ AEI (September 26, 2012)

9.26.12 Ezra Klein

The above graph has been floating around and receiving a lot of attention. Labeled “the one tax graph you really need to know” by Ezra Klein on his popular blog, this graph was produced by the Citizens for Tax Justice.

This graph shows the tax bill — importantly, federal and state and local taxes — as a percentage of income for several income groups. The bottom income quintile pays 17.4% of their income in taxes, while the top 1% pays 29%. The middle quintile pays just 3.8 percentage points less than the top 1%.

The point of this graph is correct: State and local taxes are much more uniform than federal taxes, so total taxes are less progressive than federal taxes. Indeed, according to Citizens for Tax Justice, in 2011 state and local taxes were actually regressive, with the bottom twenty percent of the income distribution paying a higher share of their income in state and local taxes, 12.3%, than any other income group, and the top 1% of earners paying less than all other income groups at 7.9%.

The problem with the graph that Mr. Klein has popularized is not that it includes taxes which it shouldn’t. Instead, it excludes taxes that it shouldn’t. Which taxes does it exclude? Negative taxes, which are also called transfers. In other words, the graph includes payments from households to the government, but it does not include all payments from the government to households.

As N. Gregory Mankiw — Harvard economist and current adviser to Governor Romney — noted on his blog back in July, using data from the Congressional Budget Office it is very easy to calculate income after taxes and transfers as a percentage of market income.

Note that this includes both federal and state transfers, but only federal taxes. As we pointed out above, state and local taxes are close to uniformly distributed across income groups. So if state and local taxes were included in this picture, the bars for the lowest quintiles would be a touch lower relative to the bars for the highest quintile. But when you’re talking about 10 or 15 percentage points this hardly matters — including state and local taxes doesn’t change the qualitative interpretation.

What does this chart show? For the lowest income group, income after taxes and transfers was four times that of income before taxes and transfers. Only for roughly the top half of income earners do taxes and transfers result in an after-tax-and-transfer income that is less than their market income — for which the ratio is less than 100%.

As the next chart shows, this relationship is not perfectly stable over time, but the qualitative story is. In economic downturns, more people qualify for transfers like food stamps and unemployment insurance payments. But the significant progressivity of the system is clearly not driven by the business cycle.

In popularizing “the one tax graph you really need to know,” Mr. Klein hasn’t even artificially truncated the distribution over taxes at zero. Instead, he seems to include some transfers from government to individuals — for example, the EITC — but not others, like food stamps, Social Security, TANF, veteran’s programs, worker’s compensation, Medicaid, CHIP, and many other transfers. Not including these transfer payments is a significant omission.

But the point remains that our tax system when properly analyzed is extremely progressive.

It is important to state plainly that in broad strokes we believe the tax code should be structured in this way: It should be the case that folks facing hard times are net beneficiaries of the government, and likewise that the most fortunate among us are net contributors.

In this presidential election, when taxes and transfers are such an important issue, the public is best served when the media presents an accurate and comprehensive description of the realities of public policy. We wouldn’t want to argue that ours is “the one tax graph you really need to know.” Really, you need to know more than one.

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Why the Stimulus Failed

Why the Stimulus Failed

By Arthur C. Brooks @ National Review (September 25, 2012)

A majority disapproves of the president’s 2009 stimulus, and according to a 2010 CNN poll, about three-quarters of Americans believe the money was mostly wasted.

Of course, the measure of economic success is not public opinion, but the factual effects of policy. The emerging evidence on various spending programs shows that Americans’ intuition is correct: The Keynesian deficit spending has been poorly designed and badly executed, and it has had little benefit for our economy.

The reason is straightforward. As many economists have found, most government spending has relatively little effect on the economy, and any effects are generally short-lived. For example, Harvard economist Alberto Alesina and his colleagues show in a new National Bureau for Economic Research study across many countries that government spending has little connection to GDP growth, making spending cuts ideal for balancing budgets without provoking a recession — but this also means that spending does little to stimulate economies. Alesina finds, however, that tax changes have large macroeconomic effects; that is, tax increases reliably depress the economy.

Again, this is not political dogma, but empirical reality. A new study published in the International Review of Economics shows that there is a direct and clear link between economic freedom and prosperity. Studying economic-freedom measures ranging from tax rates to regulation to government spending, the study authors find that from 2004 to 2008, economically freer OECD countries consistently outperformed those that were less economically free.

Is the prescription for the next administration, then, no government spending, and a move toward a minimum-tax, super-capitalist state that will gut all public services? The administration would have Americans believe that is the philosophy of today’s Ryanista Republicans. As President Obama put it in his Osawatomie, Kan., speech last December, “Their philosophy is simple: We are better off when everybody is left to fend for themselves and play by their own rules.”

This is nonsense. Conservatives today understand the importance of a reliable safety net for the truly indigent and the necessity of dealing with certain market failures. Further, there is universal support on the political right for opportunity-equalizing government policies, such as publicly funded education (ideally, administered for the benefit of children as opposed to rent-seeking bureaucrats and teachers’ unions).

But conservatives also know that when it comes to economic progress, the best government philosophy is one that starts every day with the question, “What can we do today to get out of Americans’ way?” In other words, the president should not ask what new agency or program the government can create to stimulate, bail out, or redistribute from this group to that one. That will ultimately add to our problems, rob more from our children, and make it harder to create the jobs, opportunity, and growth our country needs. The president should instead ask these questions: What tax barrier to small business can we lower; what competition-killing regulation can we rescind; what unfair crony-tax loophole can we close?

These are not new insights. Thomas Jefferson summarized them best when he famously said:

‘A wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.’

Most Americans understand these truths, and the next administration must hew to them if it wants to succeed in breaking our government out of its cycle of incompetence, failure, and excuses. This is not political propaganda or an untested theory. It is practical reality based on economic truth.

Mitt’s Taxes

Mitt’s Taxes

By Patrick Brennan @ National Review (September 26, 2012)

Quite simply: Even if our income-tax system were substantially reformed with pro-growth aims, Mitt Romney would and should still pay a much lower tax rate than many Americans less wealthy than he.

Why? Because Romney draws his income from capital, not a salary, and it is sensible that we tax the former at a lower rate than the latter. This may offend liberals’ sense of fairness, and annoy conservatives who draw high salaries, but the fact that Romney pays just 13 or 14 percent in income taxes is actually a rare virtue of our tax code rather than a defect.

Economists on the right and the left, from Greg Mankiw to Thomas Piketty and Emmanuel Saez, agree that capital gains should be taxed at a lower rate than earned income. The explanation for lower rates on capital gains is simple: Earned income is taxed the year it is earned, and then the recipient can spend or save it. If he saves it, interest and dividends are taxed again, as are realized gains from appreciation, providing a powerful disincentive to investing. Capital income is taxed twice: when its principal is earned, at either corporate or individual income-tax rates, and then when the investment is disposed of, at the capital-gains rate.

More specifically, in the U.S. tax system, corporations pay income taxes on their earnings, and then those profits either are paid out to shareholders as dividends (which are taxed at the same rate as capital gains) or accumulate in cash reserves, raising the company’s value, a capital gain. Exactly how the two rates — the 35 percent corporate rate and the 15 percent capital-gains/dividend rate — add up is a complicated question. It is not a simple matter of an arithmetic 44.75 percent, as some eagerly suggest, since “tax incidence” does not fall entirely on the shareholder. However, just as one stab at it, the CBO estimates that the average combined federal tax rate for the top 0.01 percent (who receive the vast majority of their income in the form of capital gains) is about 30 percent, and they implicitly pay about 14 percent of their income in corporate taxes. Thus, despite the appearance of a low statutory capital-gains rate, the investor class seems to pay its “fair share” (the middle quintile’s combined tax rate is 14 percent).

It is also important to note, as we discuss how to close the deficit, that capital-gains taxes are notoriously susceptible to the Laffer curve: Because individuals exercise control over when to realize capital gains, hikes in these rates yield very little revenue. A Democratic proposal, then, to tax people like Mitt Romney at higher rates, or just raise the capital-gains rate overall, is likely to constrict the economy and investment activity while raising little revenue. (Meanwhile, cuts in capital-gains rates result in much less revenue loss than cuts in taxation of earned income.)

This side issue, however, doesn’t alter the fundamental lesson to be learned from Romney’s tax returns, which even liberals must admit: Capital income is and should be taxed at a lower rate than earned income, and that, not unfairness in our tax system, is why Mitt Romney pays a low tax rate. There are many flaws in America’s tax system that need to be fixed; the marriage penalty and the partially uncompensated cost of raising children are two of them. The preferential treatment of capital gains is not.

Why Isn’t Romney Up By Ten Points? Contd.

Why Isn’t Romney Up By Ten Points? Contd.

By Peter Kirsanow @ National Review (September 26, 2012)

It appears more and more people are beginning to notice the lopsidedness of the weight accorded Democrats in most media polls. As Jim Geraghty relates today, some of the polls project Democrat turnout to exceed the +7.6 Democrat advantage of 2008. In fact, it appears many, if not most, media polls are using 2008 modeling. This is despite the fact that the most recent Rasmussen party-identification poll gives Republicans a +4.3 advantage, the highest since Rasmussen began polling.

But the disparity isn’t confined only to party identification. In a recent Ohio Newspaper Assn. poll that had Obama up by five in Ohio, Romney was preferred by independents 54–25. Obama took independents by nine points in 2008. That’s a full 38 point swing away from Obama, yet he’s purportedly beating Romney by a greater margin than he beat McCain in 2008. Neat trick.

We’ve been here before. In late October, 1980, Carter was still (supposedly) leading Reagan by 5–7 points. Less than two weeks later, Reagan crushed Carter by 9.7 points. Many of the 1980 polls were using (not unreasonably) 1976-election models. But recall that the 1976 election, because of Watergate, had one of the lowest Republican voter-identification levels in history (+16 for Democrats). Applying the 1976 model to a 1980 electorate sick of 7.5 percent unemployment, an incoherent energy policy, an embassy under siege, and a president who blamed everyone but himself for the nation’s woes yielded poll results that showed Carter besting Reagan.

Similarly, the 2008 election featured record turnout among certain demographics and produced a significant Democrat advantage. We’ll see in six weeks whether applying a 2008 model to today’s polls make as much sense as applying 1976 to 1980.

This is not to say Romney will beat Obama as Reagan beat Carter. Maybe today’s polls are right. After all, who wouldn’t be more enthusiastic about Obama after 43 months of 8 percent unemployment, plummeting household income, $5 trillion in new debt, serial trillion-dollar deficits, Obamacare, embassies under siege, a looming entitlement catastrophe, and the first credit downgrade in U.S. history?

Obama may actually have a big lead, but healthy skepticism is not unjustified.

From 1835, Alexis de Tocqueville sends a message to America about the right and wrong kinds of equality

From 1835, Alexis de Tocqueville sends a message to America about the right and wrong kinds of equality

By James Pethokoukis @ AEI (September 25, 2012)

… [Democracy In America]

‘There is in fact a manly and legitimate passion for equality that spurs all men to wish to be strong and esteemed. This passion tends to elevate the lesser to the rank of the greater.

But one also finds in the human heart a depraved taste for equality which impels the weak to want to bring the strong down to their level and which reduces men to preferring equality in servitude to inequality in freedom.

That is the difference between aspiration and redistribution, between equality of opportunity and equality of outcome, between earned success and learned helplessness. My boss, Arthur Brooks:

All surveys show that most Americans still embrace our free enterprise system—today. The crucial test is whether the country is willing to support the hard work and policy reforms that will sustain it.The cost of failing this test will be more human than financial. In our hands is the earned success—and thus the happiness—of our children and grandchildren. The stakes in the current policy battles today are not just economic. They are moral.

Health Premiums Up $3,000 Under Obama; He Had Vowed $2,500 Cut

Health Premiums Up $3,000 Under Obama; He Had Vowed $2,500 Cut

By John Merline @ Investors (September 24, 2012)

During his first run for president, Barack Obama made one very specific promise to voters: He would cut health insurance premiums for families by $2,500, and do so in his first term.

But it turns out that family premiums have increased by more than $3,000 since Obama’s vow, according to the latest annual Kaiser Family Foundation employee health benefits survey.

Could the Republicans survive Dodd-Frank?

Could the Republicans survive Dodd-Frank?

By Peter J. Wallison @ AEI (September 24, 2012)

That’s because this law may be the primary reason the economy continues to struggle.

After the financial crisis and the resulting recession, the U.S. economy actually did begin a recovery. By the fourth quarter of 2009, the GDP was growing at an annual rate of almost 4%. At that point, economists were predicting the V-shaped recovery that usually occurs after a sharp recession. Although 4% was not a Reagan-like growth number (the economy grew an average of 8% for the first three quarters of recovery in 1983), at least it suggested an economy on the move.

But as the Dodd-Frank Act took shape in the first two quarters of 2010, the economy began to slow. By the time the law was enacted in the third quarter of 2010, the average rate of growth of the three prior quarters had slowed to 2.5 percent. But the worst was yet to come. After Dodd-Frank, the average annual growth rate of GDP for the seven following quarters has been only two percent, with the most recent quarter growing even more slowly at only a 1.7 percent annual rate.

Other components of the economy also began to sink. Although the housing market had just passed its historic 3.3% trend line for growth in the second quarter of 2010, the Case Shiller Home Price index shows that it fell sharply beginning in 2010’s third quarter and has not yet recovered the level it had reached before Dodd-Frank. The same is true for manufacturing. Production there had grown to 8% by mid-2010 according to Fed data, but after Dodd-Frank it fell continuously through the rest of 2010 and into the middle of 2011. It too has never recovered its pre-Dodd-Frank level.

The policy uncertainties of Dodd-Frank, however, are of a different order, and why they pose such a danger for the future. It is impossible for anyone in business to know what is meant by the “stringent” regulations — including exposure limits — that the act requires the Fed to impose on large banks and other large financial firms; or what new regulations and costs will be imposed by the Consumer Financial Protection Bureau on small banks and others — from retailers to check-cashers — that have financial relations with consumers. No one can tell whether firms that hedge their financial and supply risks through derivatives will be able to do so in the newly regulated derivatives markets. No one can be sure there will be a liquid and robust market for fixed income securities — or the ability to issue commercial paper and other short-term securities — after the Volcker rule restricts trading by banks. No one can tell whether any but the most creditworthy borrowers will be able to get a mortgage when lenders will suffer significant penalties if borrowers can’t pay, and when private securitizers (but not the government agencies with which they have to compete) will be required to retain 5% of the mortgage pools they sell.

Finally, significant parts of Dodd-Frank are being challenged on constitutional grounds, and just about every major regulation will be challenged in court on grounds that the agency did not have authority under Dodd-Frank to impose it, that the regulation is arbitrary, capricious or unreasonable, or that it cannot pass a reasonable cost-benefit test.

In other words, the uncertainties associated with Dodd-Frank will go on for years. So the question must be asked: if Dodd-Frank is not repealed, will even the Republicans be able to revive the economy?

Sorry, New York Times, tax cuts do lead to economic growth

Sorry, New York Times, tax cuts do lead to economic growth

By James Pethokoukis @ AEI (September 17, 2012)

And one thing policymakers and journalists — and voters — should be sure of is that cutting tax rates can be a pretty effective way to boost economic growth. And raising tax rates hurts economic growth. I could point to numerous studies and historical examples. But here’s just one, a study from Christina Romer, President Obama’s former top economist: ”Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] tax cuts have very large and persistent positive output effects.”

Now some folks, mostly found on the left, would like to believe this economic reality isn’t so. They would like to believe that America can pay for the coming deluge of entitlement spending by raising taxes on the rich with no impact on economic growth.

Example: this opinion piece from liberal New York Times columnist David Leonhardt, which suggests tax cuts don’t lead to higher economic growth. Basically, his whole argument is one of simple causality. There have been times when high taxes rates and high economic growth have peacefully coexisted. In fact, growth has been higher in the U.S. when taxes have been higher. Leonhardt seems to think this conclusion from a Congressional Research Service is an argument ender:

‘The top income tax rates have changed considerably since the end of World War II. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.’

But this a very old, very tired argument.

1. Yes, from the late 1940s though the early 1960s, economic growth averaged 3.7% even though top tax rates were around 90% (though effective tax rates were much lower). From 1983 through 2007, when top tax rates were 50% or less, GDP growth averaged around 3.3%.

2. But as I have written frequently, the post-World War II decades were affected by many one-off factors, not the least of which was that they occurred right after a devastating global war that left America’s competitors in ruins. A National Bureau of Economic Research study described the situation this way: “At the end of World War II, the United States was the dominant industrial producer in the world. … This was obviously a transitory situation.”

And as former Bain Capital executive Edward Conard notes in his new book, Unintended Consequences:

‘The United States was prosperous for a unique set of reasons that are impossible to duplicate today, including a decade-long depression, the destruction of the rest of the world’s infrastructure, a failure of potential foreign competitors to educate their people, and a highly restricted supply of labor. For the sake of mankind, let’s hope those conditions aren’t repeated. It seems to me anyone who makes comparisons between today’s economy and that of the 1950s and 1960s without fully disclosing their differences is deceiving their readers.’

3. Starting in the early 1970s, economic growth slowed in advanced economies (perhaps because the benefits from great innovations from the Second Industrial Revolution had run their course.) But growth slowed less in nations that embraced pro-market reforms such as deregulation and lower marginal tax rates. For instance, while U.S. per capita GDP grew by 55% from 1981-2000, French per capita GDP grew by just 39%.

4. Then there are the Clinton years. Clinton raised taxes and the economy did just fine. What about that?

Well, a) when Clinton signed that tax hike bill, the economy had been growing for 9 straight quarters, including by 3.4% annually over the previous six quarters; b) the ’90s saw a big drop in oil prices, from $23 a barrel in 1991 to $12 in 1998, boosting real disposable incomes; c) government spending declined from 22.3% of GDP in 1991 to 18.2% in 2000, meaning fewer resources as a share of the economy were being used unproductively by Washington; d) the late 1990s saw a big cut in the capital gains tax rate to 20% from 28%; e) the late 1990s also saw a big surge in private investment, particularly in the software and business equipment category which contributed a full point to GDP during those years. Did the Clinton tax hikes cause that or was it a combo of the Internet Bubble, Year 2000 preparations, the cap gains cut, and the beginning of a computer networking and communications revolution? My bottom line on the 1990s:

‘The U.S economy entered the 1990s after undergoing a huge revamp in the 1980s: marginal tax rates were lowered from 70% to 28%, the inflation menace slayed, regulations reduced, and businesses got restructured and way more efficient. Then in the 1990s, government spending and debt were reduced, investment taxes cut, and a technological revolution kicked into high gear. Plus the Soviet Empire collapsed and the cloud of possible nuclear holocaust was lifted. Market capitalism was on the march. People were optimistic as heck about the future. And in the midst of all that, taxes were raised in 1993. So that means taxes should be raised now — and Obama wants to do so in the most economically harmful and inefficient ways — in a time of economic stagnation and pessimism?

Taxes and tax rates aren’t the only things that matter to economic growth, of course. And every tax cut won’t pay for itself. Moreover, government needs enough revenue to pay for defense, basic research, and a safety net.

But taxes are pretty important. And pro-growth tax reform – particularly if the U.S. shifted from an income tax to a consumption tax – could boost employment and income growth and give government more revenue to pay down debt.

Have mercy on the nation that doubts that.

Missing in Action: Growth

Missing in Action: Growth

By Steve Connor @ The American (September 17, 2012)

Neither party denies that our growing debt is rapidly taking us in the wrong direction, but neither party is giving the best remedy—economic growth enhancement—the top billing it deserves.

In the economic policy debate, there are two elephants in the room: The size and growth of our national debt, and the size and growth of our national economy. They belong together; when we address one, we should address the other at the same time. Unfortunately, that hasn’t been happening.

Nonetheless, the size and growth of our overall economy deserves more attention than the debt, and more attention than the middle segment of our society’s income distribution. Why? Because the larger our overall economy, relative to the debt, the less of a debt problem we face, and the better off all income classes will be. Sufficient growth solves many problems, and that is why it deserves top billing in the policy debates. (This has been the subject of previous essays of mine, such as “What Does Fiscal Responsibility Mean?” and “The Debt Ceiling Distortion,” but the theme is worth repeating.)

One elephant: The growing national debt

The national debt is large and growing. During political campaigns, it always gets plenty of attention from the party trying to recapture the White House, but seldom gets much airtime from the incumbent party. For example, prior to the crash in 2008, candidate Obama pointed to the increase in the debt as a major failure of the Bush presidency. But four years later, the roles have been reversed. It is now the Republicans’ turn to draw everyone’s attention to the federal debt. As a result, the Republican convention in Tampa dutifully featured an in-our-face debt clock, while the Democrats’ convention in Charlotte dutifully ignored the subject.

That reversal is no surprise; it’s politics. “Debt” is a scary word, and “16 trillion” is a scary number. The Democrats are avoiding the subject of our $16 trillion federal debt for good reason: They want to retain the White House, and avoiding that issue is smart politics. Likewise, the Republicans want to recapture the White House; pressing the debt as an issue is smart politics for them.

The other elephant: Growing the national economy

Similar to the national debt, the national economy is also large and growing. But it was at best a secondary theme at both parties’ conventions. Economic growth received honorable mention in a few speeches, but got nowhere near the top billing it deserves. That’s too bad, because the biggest benefits of economic growth include its ability to offset any problems caused by the federal debt—even if the debt continues to grow and grow—as well as its ability to boost incomes in all classes, not just the middle class. John F. Kennedy said it succinctly: “A rising tide lifts all the boats.” As an example, President Obama submitted a budget in 2009 that forecasted a real growth rate that would climb to 4.2 percent  by 2013; of course, that trajectory hasn’t panned out, but if it had, the deficit and debt would not be major issues today. (The current growth rate is less than half of that estimate, by the way, and that’s the main reason the deficit and debt are major issues.)

Although neither party denies that our growing debt is rapidly taking us in the wrong direction, neither party is giving the best remedy—economic growth enhancement—the attention it deserves. Why? Because short-term politics trumps long-term economics. Inequality anecdotes play better to the Democrats’ base; fear of debt plays better to the Republicans’ base. The Democrats’ focus on reducing inequality to correct perceived economic injustice crowds out the growth discussion. Likewise, the Republicans’ error of equating the debt “level” with the debt “burden” tends to narrow the debate to “cutting spending,” which also crowds out the growth discussion.

When growth is crowded out of the debate, its major benefit fades into our past. The presidencies of Kennedy, Reagan, and Clinton revealed the economic bonanza that growth can yield: A surprisingly large increase in federal tax receipts without the need for any increase in tax rates, and reduction or elimination of the burden of debt. Growth lifts all boats, and it deserves top billing in economic policy debates.

Tax Rates Impact Economic Performance, but other Policies also Matter

Tax Rates Impact Economic Performance, but other Policies also Matter

By Daniel J. Mitchell @ CATO (September 17, 2012)

…even though I’m a big advocate for better tax policy, the lesson from the Economic Freedom of the World Index…is that adopting a flat tax won’t solve a nation’s economic problems if politicians are doing the wrong thing in other areas.

There are five major policy areas, each of which counts for 20 percent of a nation’s grade.

  1. Size of government
  2. Regulation
  3. Monetary Policy
  4. Trade
  5. Rule of Law/Property Rights

Now let’s pick Ukraine as an example. As a proponent of tax reform, I like that lawmakers have implemented a 15 percent flat tax.

But that doesn’t mean Ukraine is a role model. When looking at the mix of all policies, the country gets a very poor score from Economic Freedom of the World Index, ranking 125 out of 141 nations.

Conversely, Denmark has a very bad tax system, but it has very free market policies in other areas, so it ranks 15 out of 141 countries.

In other words, tax policy isn’t some sort of magical elixir. The “size of government” variable accounts for just one-fifth on a country’s grade, and keep in mind that this also includes key sub-variables such as the burden of government spending.

Yes, lower tax rates are better for economic performance, just as wheels matter for a car’s performance. But if a car doesn’t have an engine, transmission, steering wheel, and brakes, it’s not going to matter how nice the wheels are.

Not let’s shift from theory to reality. Here’s the historical data for the United States from Economic Freedom of the World. As you can see, overall economic policy moved in the right direction during the Clinton years and in the wrong direction during the Bush-Obama years.

To be more specific, the bad policy of higher tax rates in the 1990s was more than offset by good reforms such as lower trade barriers, a lower burden of government spending, and less regulation.

Similarly, the good policy of lower tax rates last decade was more than offset by bad developments such as a doubling of the federal budget, imposition of costly regulations, and adoption of two new health entitlements.

This is why I have repeatedly challenged leftists by stating that I would be willing to go back to Bill Clinton’s tax rates if it meant I could also go back to the much lower levels of spending and regulation that existed when he left office.