Archives: April, 2007

England Contemplating Territorial Tax Regime

The core principles of good tax policy are low tax rates, taxing income only one time (no more double-taxation of saving and investment), no special loopholes (which also means simplicity), and territoriality (only tax income inside national borders). The Anglo-Saxon world is often guilty of violating the last principle, generally imposing worldwide taxation. Fortunately, tax competition is eroding the ability of nations to impose bad tax policy. The United States, for instance, approved the Homeland Investment Act a couple of years ago, which temporarily allowed companies to repatriate foreign-source income at a much lower rate of tax. The United Kingdom is now considering a a much better solution – a permanent change that would move much closer to a territorial tax regime. As is so often the case, tax competition is the impetus for the reform. British policy makers are afraid that companies are moving abroad to escape the anti-competitive burden of having foreign-source income subject to tax by both the nation where it was earned (which is appropriate) and the British Exchequer. reports on this potentially important development:

The United Kingdom government is reportedly working on proposals that would allow British-based multinationals to repatriate billions of pounds in profits earned overseas free of tax. According to a report by the Financial Times, the Treasury is preparing to launch a consultation document this Spring which will discuss a number of options, including an European-style “participation exemption” for foreign dividends, as well as a different approach to the anti-avoidance rules that impose tax on profits generated in low-tax jurisdictions. The move by the British government is being viewed as part of its effort to improve the corporate tax regime, after several warnings from business groups that recent additions to UK tax legislation are making the country increasingly uncompetitive compared with its economic rivals. Seemingly heeding these calls, Chancellor of the Exchequer Gordon Brown announced in his budget statement last month a 2% cut in corporate tax to 28%, bringing the UK below the OECD corporate tax average. …it is anticipated that the change would be welcomed by companies, as they would no longer have to apply complex tax strategies to minimise taxes on repatriated profits.

Kurt Vonnegut, Libertarian?

No, probably not. He called himself a socialist. But his satires of war and government often sounded libertarian themes. One libertarian argues that his 1952 novel Player Piano, though usually understood as a critique of technology and automation, can also be seen as a prescient criticism of “neocon America,” in which “the centralization of corporate/government power over the economy and security forces is a legacy of the last war, which was largely responsible for putting engineers and managers in charge of a command economy.”

And he did write one of the great libertarian short stories, “Harrison Bergeron,” the story of a world in which the U.S. Handicapper General gives everyone “handicaps” in order to make us all equal–masks for the beautiful, weights for the strong or fast, buzzers in the brains of the smart. The tagline of the 1995 Showtime movie starring Sean Astin and Christopher Plummer was “All men are not created equal. It is the purpose of the Government to make them so.”

Socialist or not, we could use more satirists and fewer red team/blue team party-liners. We will miss Kurt Vonnegut.


European Bureaucrats Want Massive Expansion of Savings Tax Cartel

Appeasement generally is not a good strategy since it encourages an aggressor to make additional demands. This certainly is the case in Brussels. The European Commission is gearing up for a campaign to expand the size and scope of the so-called savings tax directive. This cartel seeks to prop up bad tax policy by making it easier for high tax nations to double-tax income that is saved and invested. The bureaucrats in Brussels are upset that the current version of the directive, which was implemented in 2005, is riddled with loopholes, enabling most taxpayers to protect their assets from an additional layer of tax. So now they want to expand the directive, both in terms of the types of savings and investment that would be subject to double-taxation and the number of countries asked to be in the cartel. Hong Kong and Singapore already have told the Europeans that they have no desire to sabotage their economic interests by helping Europe’s welfare states track - and tax - flight capital. This resistance is good news, but the bureaucrats learned from the first round of this battle that it is possible to badger low-tax jurisdictions into making foolish decisions. The Financial Times reports on the European Commission’s radical agenda:

has launched a drive to close the gaping loopholes in a two-year-old European savings law… early evidence is that the directive is failing to bite. Switzerland, the world’s biggest offshore financial centre, only raised €100m in the first six months of the law’s operation. Meanwhile Mr Kovacs is worried that some savers have moved to Hong Kong and Singapore – not covered by the directive – and he is trying to arrange reciprocal deals with them. …Whether he can persuade EU member states and third countries to give their unanimous agreement is questionable: diplomats say big offshore financial centres like Switzerland, Luxembourg and Austria only agreed to the directive precisely because it contained so many loopholes. …A Commission working document…proposes…extending the directive’s reach to include companies and trusts. It also floats the idea of blocking the deliberate routing of interest payments through branches of banks located in jurisdictions not covered by the directive, whose reach also includes several Caribbean islands, the Channel Islands and the Isle of Man. The working paper suggests that the tougher definition of “beneficial ownership” used for anti-money laundering obligations should be adopted for the savings directive. This would bring discretionary trusts and companies into its scope. It suggests imposing a new obligation on EU banks to report – or withhold – interest payments made through non-EU branches. …It suggests reconsidering whether interest-generating securities “wrapped” within life insurance, pension or annuity contracts should be exempt from the directive.

Will Growing Government Turn America into a European Welfare State?

If left on auto-pilot, government spending is going to consume larger and larger shares of America’s economic output. But many people already know about this entitlement-driven crisis. What is less well known is that the tax burden is scheduled to rise significantly as well. In part, this is because the Bush tax cuts are scheduled to disappear at the end of 2010 and the AMT is projected to trap more taxpayers. But the biggest factor is that economic growth leads to “real bracket creep,” meaning more people will face higher tax rates because of rising income levels. Kevin Hassett of the American Enterprise Institute warns that America is at risk of becoming like France if steps are not taken to reduce the tax burden and dramatically curtail the growth of spending:

The U.S. has consistently outgrown its European allies for many years. There is little dispute among economists that the U.S.’s big advantage is its relatively small government. Federal government outlays take up about 20 percent of U.S. gross domestic product; in France, it’s almost 55 percent. …The latest budgetary maneuverings in the U.S. have virtually guaranteed that a good bit of that advantage will disappear, at least if Democrats remain in power. The current laws, as written, have put the U.S. on the road to France. The primary culprit is our programs for retirees. According to the latest long-run outlook of the Congressional Budget Office, government spending may take up fully 50 percent of GDP by 2050. Yet revenue will increase tremendously over the same time period. Revenue relative to GDP, currently a smidgen more than 18 percent, will climb to 23.7 percent by 2050 and extrapolate out to a whopping 27.5 percent by 2075. A spending binge is coming, and a good chunk of the revenue needed to pay for it is coming as well. The bad news for fans of small government is this: Even if spending were reined in enough to keep it equal to revenue, the size of the government will increase by about 50 percent in the coming decades.

Book Club Monopoly?

Bertelsmann AG of Germany has agreed to buy out Time Inc.’s interest in Bookspan, their book-club joint venture that includes Book-of-the-Month Club, American Compass, and other clubs. The Wall Street Journal reports that

The deal, announced today, would leave Bertelsmann as the only major operator of book, music and DVD clubs in the U.S.

Uh-oh! Sounds like a monopoly. Should we call the FTC? Launch a congressional hearing? No–first because nothing has actually changed; the joint venture was apparently already the only operator of such clubs. The only difference is that Bookspan is now solely owned by Bertelsmann.

But if two sets of book clubs had merged, then we might be hearing the same sorts of calls for antitrust investigation that we heard in regard to the proposed merger of the XM and Sirius satellite radio networks. And the argument would be just as ridiculous. A monopoly book club would not control book consumers; it would still compete with Amazon and Laissez Faire Books and other services for mail-order book consumers; and also with actual bookstores for book consumers generally; and with magazines and newspapers for readers; and with movies, television, radio, and iPods for the time and attention of consumers. Just like–as the Journal said a week or so ago–“a combined Sirius-XM would have to compete not only with free broadcast radio but also with MP3 players, online radio and even music channels offered by cable providers.”

Response to Tom Mann on Campaign Finance Reform

Tom Mann has responded to earlier criticisms by Bob Bauer and me of an op-ed by Norman Ornstein and Anthony Corrado. Bob responds on our behalf here. Bob has done well as usual; I respond here on my own behalf.

Mann argues that the Bipartisan Campaign Reform Act (BCRA) did not devastate the political parties. But I did not argue that it had devastated the parties. Tom concedes my original point: earlier trends suggest the parties have fewer resources in 2006 than they would have had without BCRA. I argued that this shortfall for the parties cost the Democrats 15 to 20 seats in 2006 since they were not able to fully exploit the national shift in public mood. Tom says they had enough money to contest the races. My claim about the effects on the party came from Rahm Emanuel and other party leaders. Here’s evidence from the New York Times [$$$] quoted in an earlier post:

Stan Greenberg, the Democratic pollster, …said that Republicans held 14 seats by a single percentage point and that a small investment by [Howard] Dean [head of the Democratic National Committee] could have put Democrats into a commanding position for the rest of the decade…” There was a missed opportunity here,” he said. “I’ve sat down with Republican pollsters to discuss this race: They believe we left 10 to 20 seats on the table.”


Mr. Emanuel said … : “More resources brings more seats into play. Full stop.”

Emanuel’s statement supports my claim. Tom himself cites the testimony of Terry McAuliffe, a Democratic party leader, in his post on another matter. If McAuliffe counts, so does Emanuel.

Here are some other arguments from Tom Mann (in italics) and my replies:

BCRA did not ban any political ads; it stipulated that electioneering communications may not be funded by corporations and unions.

Well, if an “electioneering communication” is a type of political ad and a law stipulates that corporations and unions may not fund them, then the law has banned the funding (and hence, the existence) of a certain kind of political ad. Part of the struggle over BCRA was whether these ads were “issue ads” (and hence protected by the First Amendment) or like contributions to campaigns (and hence, illegal because or earlier bans on contributions by labor unions and corporations). BCRA defined the ads as contributions by calling them “electioneering communications.” The Supreme Court acquiesced in that definition. The ads have disappeared from campaigns. The regulation of money does appear to eliminate speech. Sen. McCain himself thought disclosure of the supporters of the advertising would be enough to stop the ads (i.e. the political speech). Or so he said on the floor of the Senate.

There is another part of this story. These issue ads were irritating and threatening vulnerable members of Congress. In response, Congress declared funding of the ads illegal. That strikes me as striking evidence that campaign finance regulation protects its authors, i.e. members of Congress.

The amount of political advertising in 2006 supports the view that BCRA did not constrain vibrant free speech.

This is an interesting confusion. If we define vibrant free speech as “the amount of political advertising in 2006,” then indeed BCRA did not constrain vibrant free speech. But if BCRA constrained spending on political speech and other electoral activities, then it did restrict free speech, even if we had lots of speech otherwise. “Vibrant” here means something like “enough” political speech. Thus BCRA may have restricted some speech, but the society had enough for its purposes.

There is a parallel here to an argument made some years ago by the law professor Owen Fiss. He argued that the free speech of some disfavored speakers might be restricted to foster a “rich public debate,” which he took to be the goal of the First Amendment. Hence, in Fiss’s view, the First Amendment empowered government to suppress speech for the higher goal of a “rich public debate.”

Tom Mann is not explicitly arguing for suppression of speech. But he is implicitly reading the First Amendment as expressing a social goal rather than a restraint on government. Once we have “enough speech,” we should not be especially worried about restrictions on some speech.

This point supports Tom’s general observation that arguments about campaign finance are dependent on political theory. As I argue in The Fallacy of Campaign Finance Reform, progressives have come to see the First Amendment as empowering government to regulate and suppress speech in pursuit of larger social goals. But the First Amendment simply restricts the government’s power over speech. It does not say the government may limit freedom of speech if we have enough speech during an election, or to assure that we have the right kind of speech for a “rich public debate.” It just restrains the government. (In the interest of accuracy, I should point out that not all of Tom Mann’s allies mentioned in his post are progressives; Michael Malbin is not for one).

Party soft money was not diverted to 527s. The research on this by the Campaign Finance Institute, reported in The Election After Reform, is crystal clear.

Mann may be correct here. If so, the parties were deprived of huge sums in 2006.

Samples judges BCRA by the arguments made in Congress by some of its supporters. I don’t doubt that some wanted to reduce the overall amount of money in campaigns and eliminate negative advertising. But those were not built into the design of the law.

This implies that the Senators who explicated the law on the floor of the Senate and later voted for BCRA did not understand its purposes or how it would work. We should wonder about the validity of a law if the people who enacted it did not understand its goals or its design. But, then again, the goals many senators assigned to BCRA were not constitutional. (You can read about the many purposes of BCRA in the Introduction to The Fallacy of Campaign Finance Reform).

Tom Mann finishes up by arguing that my “libertarian framework” leads me to ignore reality. (Similarly, Ornstein and Corrado branded critics of BCRA as “ideologues” in their original Washington Post piece). Here’s what Tom is doing rhetorically: Libertarianism is a kind of religion that believes things without proof. We – that is, Tom Mann and company – are pragmatic and moderate, trying to grapple with complexity in pursuit of the common good. So who are you going to believe? The simple-minded fundamentalist or the scientific centrists?

This is a neat rhetorical gambit often deployed by self-described moderates. But there are several ironies here.

First, Tom’s allies in the “reform community” (though not Tom himself, or any of the people he mentions) are not especially scientifically-minded. For example, I have been told that such self-described reformers have bitterly criticized political scientists for not finding evidence of corruption caused by campaign contributions.

Second, The Fallacy of Campaign Finance Reform is filled with attention to empirical work and some original analysis of data. I do not simply assert that campaign finance law protects incumbents, I discuss data that is consistent with that hypothesis. I also mention data that is not consistent with that hypothesis (for the latter, see pages 231-2). I also deal with empirical work that suggests contributions do influence congressional behavior (see pages 98-100). I do discuss the political theories behind the campaign finance struggle. And yes, you can get all that for $22.04 plus shipping!

Note also that I wrote above, “Mann may be correct here.” But read the book and then decide for yourself whether Tom is correct about my attitude toward empirical evidence.

Third, policymaking about campaign finance itself has not been anything like the empirically-minded model Tom sets out. The basic federal campaign finance law was passed in 1974 (and amended a bit shortly thereafter). Its regulations were justified as a means to prevent corruption or the appearance of corruption. Over the next three decades studies consistently cast doubt on the influence of contributions on policymaking. Other studies indicated that campaign finance rules had little to do with trust in government. Were the laws changed in response to these studies? For example, were contribution limits raised to keep up with inflation or even increased? In fact, the limits were left at their 1974 levels, thereby becoming ever smaller through the effects of inflation. The appearance of corruption rationale, for its part, remains a frequently-cited justification for more campaign finance regulations. To be sure, studies have been used to justify more regulation of money in politics. Studies that suggest liberalization, however, are ignored by judges and legislators. In science, that’s called selection bias. In politics, it’s called business as usual.

Duke University Students Are “Innocent”

The North Carolina Attorney General has just announced that the criminal charges against the Duke University lacrosse players have been dropped because the young men are “innocent.”

Much will be said about Michael Nifong, the original prosecutor who is now facing an ethics investigation. However, as I’ve said before, I think it’s a mistake to think that this case was about one rogue prosecutor. The problems are more systemic than many wish to acknowledge.