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ECONOMIC FREEDOM

Updated: Dec 16, 2021

Our current economy is more crony capitalist than it is free, and that is responsible for the majority of problems that some try to blame on capitalism.

The size and scope of the federal government.


Let’s start with the U.S. budget and overall size of government. As can be seen from the charts below (courtesy of the Cato Institute’s Chris Edwards), inflation‐​adjusted government expenditures have grown steadily over the last several decades, while spending as a share of GDP has fluctuated but is still up since libertarians first “assumed control” of D.C. in the ’70s:



Most of this increase is driven by entitlements, which libertarians have of course been trying—mostly unsuccessfully—to reform for decades:


In terms of international comparisons, total U.S. federal spending as a share of GDP is larger than Ireland, Chile, Korea, Colombia, Switzerland, Costa Rica and Lithuania, and within a percentage point of Australia, Latvia, and Japan. In terms of just government health spending, the U.S. government spends more dollars per capita than, well, basically everybody:




Much of this spending is captured in the dramatic rise in federal subsidy programs between 1970 and 2015:



… and the tens of millions of Americans today receiving some form of federal support:


Then there’s the debt—another longstanding libertarian priority and one that, per the latest CBO figures, pretty much speaks for itself:



The administrative state.


Despite some prominent “libertarian” deregulation victories (airlines, telecommunications, banking, and transportation, for example), the regulatory state’s overall story is one of slow and continued expansion. The Mercatus Center’s regulation project provides one example, in counting just how long it would take a person to read the entire Code of Federal Regulations:



The Competitive Enterprise Institute provides another metric, in final rules issued in the Federal Register:



CEI adds that “[g]oing back to 1976, when the Federal Register first began itemizing them, 204,802 rules have been issued.” Other, more complex metrics find similar growth—and impact—of the administrative state.

This growth has been especially pointed at many of the agencies that libertarians most vigorously criticize, including but not limited to the FBI, ATF, DEA (and federal drug control programs), ICE, and the TSA:





State and local government.


The long‐​term growth of spending and regulation, of course, is not limited to the federal level. As noted above, state and local budgets are up substantially as a share of GDP, and they’ve also increased in real terms:





… as have state and local regulations, especially for occupational licensing:


In the 1950s, approximately 5% of U.S. workers had an occupational license, meaning they completed additional schooling or training (and paid the necessary fees) and passed an exam to be licensed to practice the profession in a certain state. Today, the Bureau of Labor Statistics estimates that 23% of full‐​time workers have a license. (For comparison, fewer than 3% of workers in the U.S. are paid at or below the federal minimum wage and fewer than 11% of workers currently belong to a labor union.) This uptick in licensed workers is the direct result of the growth of occupational licensing laws. In the early 1990s, 800 occupations required licenses in at least one state. In 2016, that number increased to approximately 1,100 occupations.



And housing:









Treasury Secretary Janet Yellen has proposed that governments around the world require payment of at least a uniform “global minimum corporate tax.” A motivation for Yellen’s push for a global minimum corporate tax is fear that the Biden administration’s proposed increase in the US corporate tax will cause some American corporations to flee the US for countries with lower corporate taxes.


President Biden wants to increase corporate taxes to help pay for his so-called infrastructure plan. The plan actually spends more on “progressive” priorities, including a down payment on the Green New Deal, than on infrastructure.


Much of the spending will benefit state-favored businesses. For example, the plan provides money to promote manufacturing and electric vehicles. So, the idea is to raise taxes on all corporations and then use some of the received tax payments to subsidize government-favored businesses and industries.


A global minimum corporate tax will also set a precedent for imposition of other global minimum taxes on individuals. This scheme may even advance the old Keynesian dream of a global currency. The Biden administration is already taking steps toward a global currency by asking the International Monetary Fund to issue more special drawing rights (SDRs).


Global tax and fiat currency systems will only benefit the world’s political and financial elites. In contrast, regular people across the world benefit from limited government, free markets, sound money, and reduced or eliminated taxes.





The Tax System


The federal tax system relies on a number of taxes to generate revenue. By far the largest source of funds is the income tax that individuals, estates and trusts pay. In 2018, the Internal Revenue Service (IRS) collected a net $1.57 trillion in personal income taxes, or 52.4% of the total.1 Personal income taxes are levied against wages, interest, dividends and capital gains. Ordinary income rates are marginal based on income, while long-term capital gains enjoy preferential treatment.2 3


The payroll tax that funds Social Security benefits and Medicare is the next largest source of national revenue. The IRS collected a net $1.13 trillion in FICA taxes in 2018, or 37.6% of the total.1 The payroll tax is levied at a fixed percentage on salaries and wages, up to a certain limit, and is paid equally by both employer and employee.4


The next biggest categories are the corporate tax, which contributed 6.8% to national coffers, and the excise tax levied against items such as gasoline and tobacco, which contributed 2.4%.1 See the chart below for more details.



What Is the Laffer Curve?


The Laffer Curve is a theory formalized by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate the argument that sometimes cutting tax rates can result in increased total tax revenue.



KEY TAKEAWAYS

  • The Laffer Curve describes the relationship between tax rates and total tax revenue, with an optimal tax rate that maximizes total government tax revenue.

  • If taxes are too high along the Laffer Curve, then they will discourage the taxed activities, such as work and investment, enough to actually reduce total tax revenue. In this case, cutting tax rates will both stimulate economic incentives and increase tax revenue.

  • The Laffer Curve was used as a basis for tax cuts in the 1980's with apparent success but criticized on practical grounds on the basis of its simplistic assumptions, and on economic grounds that increasing government revenue might not always be optimal.

Understanding the Laffer Curve


The Laffer Curve is based on the economic idea that people will adjust their behavior in the face of the incentives created by income tax rates. Higher-income tax rates decrease the incentive to work and invest compared to lower rates. If this effect is large enough, it means that at some tax rate, and further increase in the rate will actually lead to a decrease in total tax revenue. For every type of tax, there is a threshold rate above which the incentive to produce more diminishes, thereby reducing the amount of revenue the government receives.


At a 0% tax rate, tax revenue would obviously be zero. As tax rates increase from low levels, tax revenue collected by the also government increases. Eventually, if tax rates reached 100 percent, shown as the far right on the Laffer Curve, all people would choose not to work because everything they earned would go to the government.


It's thus necessarily true that at some point in the range where tax revenue is positive, it must reach a maximum point. This is represented by T* on the graph below. To the left of T*, an increase in tax rate raises more revenue than is lost to offsetting worker and investor behavior. Increasing rates beyond T*, however, would cause people not to work as much or not at all, thereby reducing total tax revenue.





























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