Archives: 11/2007

Swiss Report Exposes EU’s Hypocritical “State-Aid” Attack against Tax Competition

In a fight that may be a precursor to World Trade Organization battles involving America, the European Commission has been persecuting Switzerland because pro-market cantonal tax laws supposedly are a form of state aid. The EU’s state-aid rules prohibit (at least in theory) handouts to individual companies since subsidies create an un-level playing field, and the EC apparently thinks that low taxes in Swiss cantons are akin to a subsidy. Switzerland is not a member of the European Union, but the EC argues that a trade treaty obliges the Swiss to obey rulings from Brussels. Tax-news.com reports on a recent meeting, noting that the Swiss are holding firm against outside interference:

The EC argues these cantonal company tax regulations restrict trade in goods between Switzerland and the EU, and distort competition. … the Swiss delegation, led by Alexander Karrer, Head of the Monetary Affairs and International Finance Division in the Federal Department of Finance, and including representatives from the cantons, argued that Swiss taxes do not distort bilateral trade, because the types of company concerned in Switzerland have no, or at most subordinate, business operations which are taxed normally. … Furthermore, the Swiss emphasised that both domestic and foreign-controlled companies are entitled to take advantage of holding-company privileges. The European Commission is basing its legal argument against Switzerland on the latter’s alleged breach of state aid rules, which, in the EU, are in place to prevent member states from favouring certain companies and industries with beneficial tax rules and subsidies. But the Swiss say that the EC’s arguments rest on shaky very legal ground, pointing out that the country is neither an EU member or part of the Single European Market, nor party to the competition regulations of the EC Treaty, including those on state aid. Moreover, Bern insists that even if the tax laws in question were covered by the 1972 Free Trade Agreement, they would not fall under the EU’s definition of state aid, because they do not favour certain companies or industries.

Interestingly, the Swiss government recently released a report exposing the European Commission’s hypocrisy. The full report is only available in French and German, but Pierre Bessard of the Institut Constant de Rebecque in Switzerland shared with me his useful analysis. On the broader issue, Pierre noted that the report revealed that the EU allows many exceptions to its supposed prohibition of fiscal state aids, and allows generous subsidies while limiting tax competition, while Switzerland does not subsidize businesses but allows greater tax competition, which leads to innovation in the public sector and relative government efficiency.” And on the specific issue of state aid, Pierre also explains that the report reveals that “65% of state subsidies in the EU go to manufacturing and services, and only 26% to agriculture.” In other words, the subsidies for business in the EU, which clearly do create an un-level playing field, are more than twice the size of the widely criticized subsidies from the Common Agricultural Policy. In Switzerland, by contrast, individual businesses do not receive handouts and instead are allowed to compete in a low-tax environment

At first glance, this Swiss-EC spat may seem interesting just to tax geeks, but do not be surprised if the United States is ensnared in this type of fight at some point in the future. Statist academics and policymakers already are making the argument that low tax rates “distort” trade by causing jobs and investment to migrate away from high-tax jurisdictions. It is not inconceivable to think that the European Court of Justice might accept this argument at some point, thus paving the way for more extensive tax harmonization in Europe. The next step would be the World Trade Organization. I hope my fears are misplaced, but experience teaches us that politicians are very clever at expanding the power of the state.

Britain’s “Incapacity” Racket

The United Kingdom has an “Incapacity” program for people allegedly unable to work. And like the “Disability” portion of America’s Social Security program, the British system is a magnet for fraud. The Times reports that more than $8 million was paid to people who are “too fat” to work. But this is a drop in the bucket compared to the people receiving handouts for mental health reasons. In an obvious sign that people are scamming the system (unless the UK’s government-run health care system is even more dangerous than current stories suggest), the number of people who are ostensibly incapacitated has tripled in less than 30 years:

Almost two thousand people who are too fat to work have been paid a total of £4.4 million in benefit, it emerged last night. Other payments went to fifty sufferers of acne… Billions of pounds is being paid in benefits to people claiming to be unable to work because they suffer from depression, stress, fatigue and unknown or unspecified diseases. …Frank Field, a former Social Security Minister, said last night that too many people were working the incapacity benefit system to avoid work. “It is a racket, which governments have allowed to exist for far too long. I do not blame people for working the system, it is the job of politicians to stop them doing it.” …The number on incapacity benefit has more than trebled since 1979… More than £2 billion was paid in 2006-07 for mental health complaints, including £518 million to those with what are described as “unknown and unspecified” diseases.

Corporate Tax Lobbying

In the popular media, Capitol Hill is swarming with corporate tax lobbyists pushing lawmakers to enact unjustified loopholes for their businesses. Sometimes that is true, but probably more often businesses are on the Hill fighting against unjustified revenue grabs by politicians trying to soak them with tax hikes invisible to the general public.

The big tax bill recently introduced by House Ways and Means chairman, Charles Rangel, provides many examples of unjustified revenue grabs. A corporate tax lawyer sent me a one-pager on proposed changes to LIFO inventory accounting:

LIFO in a Nutshell

Among provisions of Chairman Rangel’s “Tax Reduction and Reform Act of 2007” is repeal of the LIFO method of valuing inventory. According to scoring by the Joint Tax Committee, repeal would raise additional tax revenue of over $100 billion over ten years. Although complicated in its details, the rationale for LIFO is both simple and sensible – the best way of measuring the income of businesses with rising costs of supplies … LIFO is an abbreviation for “last-in-first-out”. This is opposed to the other common inventory accounting convention which is “FIFO” for “first-in-first-out” … LIFO is considered a more accurate accounting method when inventory costs are rising, by taking into account the greater costs of replacing inventory. This gives a better measure of both the financial condition of the business … After thorough consideration of the issue by the Congress, LIFO came into the tax law in 1939.

To sum up: Out of the view of average voters, Mr. Rangel wants to change established law of seven decades to shake an added $100 billion (that’s with a “b”) out of U.S. manufacturers, in a way that apparently doesn’t make any economic sense and will damage their competitiveness, while federal revenues are pouring into the Treasury and have already risen above historically normal levels.

Three cheers for the corporate tax lobbyists who fight this sort of nonsense!

Supreme Court To Hear Landmark Case

The Supreme Court just announced that it will decide a landmark lawsuit concerning the constitutionality of the District of Columbia’s ban on guns. This is terrific news. My colleague, Bob Levy, senior fellow in constitutional studies here at Cato, is the prime mover behind the lawsuit. The whole idea of challenging the DC ban several years ago was to get a good Second Amendment case to the Supreme Court, i.e. plaintiffs who were responsible people who simply wanted to keep a handgun in their home for self-defense purposes. The Court will be hearing arguments in the case early next year and we can expect a ruling in the case by late June.

For a quick podcast interview with Bob Levy about the lawsuit, go here (or subscribe via iTunes). To listen to or watch a Cato policy forum about the lawsuit, go here. For Cato scholarship about the right to keep and bear arms, go here. For lawyers and law students interested in all the details about the lawsuit, go here and here.

Tax Agency Failures

Laptops lost with taxpayer personal information. Sluggish bureaucracy. Massive fraud from tax credit schemes. Tax credits called a “nightmare” of complexity. Thousands of administrative errors and unwarranted penalty notices.

Sounds like the IRS. But it’s another country with a high-rate, loophole-ridden income tax. The United States is not the only country that needs a flat tax.

Derek Jeter Battles the New York Tax Bureaucracy

The Wall Street Journal opines on the New York government’s attempt to extort more money from the Yankee shortstop. The most interesting revelation is that Jeter apparently followed the rules and avoided being in the state for more than 183 days, but the tax collectors want to apply a different rule simply because Jeter has expressed his “love for New York.” Who knew free speech could be so expensive?

New York’s tax bureaucracy…has made a refugee out of one of its most famous icons. …Who can blame him? Florida has no personal income tax, while New York’s rate for the top bracket is 6.8%, rising to [10.5]% in New York City… That makes for one of the worst tax burdens in America – and politicians are proud of it. …New York tax laws also take a notoriously wide view of “residency.” Literally tens of thousands of people only work in-state Tuesday to Thursday each week to avoid spending the requisite 184 days per year that would subject their full income to the state tax regime. And Albany’s taxmen try to catch them with things like travel records, credit-card usage and phone logs. …state auditors don’t dispute that his primary residence was in Florida before 2001 or after 2003, or even that he spent most of the year down south over the target period. Rather, they’re employing the more subjective “domicilery test.” They point to Mr. Jeter’s Manhattan apartment, his “numerous public statements professing his love for New York,” and allege he has “immersed himself in the New York community.” Gosh. Yankee owner George Steinbrenner is also a primary resident of Florida, no doubt for the same reasons as Mr. Jeter and who knows how many other professional athletes.

There are broader lessons to be learned from this episode. First, taxpayers respond to incentives, even if politicians like to pretend that high tax rates don’t impact behavior. Second, federalism is a good idea because it creates both good examples and bad examples. Third, maybe if New York wasn’t such a high-tax hell-hole, my beloved Yankees could concentrate on reclaiming their birthright by winning the World Series.

Hopkins on Gerson

Kara Hopkins has an elegant review of Heroic Conservatism, former Bush speechwriter Michael Gerson’s book, over at The American Conservative. Worth reading in full, but here’s a taste. Gerson on war:

Shortly after Gerson began scripting Bush, reporters noticed Biblical phrases creeping into the presidential rhetoric and wrote, with cryptologist’s glee, that Bush was sending coded messages to his Christian base. The truth was more perverse. As Presbyterian minister Fritz Ritsch noted, when Bush alluded to the hymn “There’s Power in the Blood” in a State of the Union text, he spoke of the “wonder-working power” not of the “precious blood of the Lamb” but of “the goodness and idealism and faith of the American people”—the world’s substitute saviors. Similarly, the president referred to the U.S. as “the light of the world,” which the “darkness” has been unable to put out—a clear invocation of John 1:1-5. As evangelical pastor Gregory Boyd pointed out, “In this paradigm, what applies to Jesus (“the light of the world”) can be applied to our country, and what applies to Satan (“the darkness”) can be applied to whomever resists our country. We are of God; they are of the Devil. We are the light; they are the darkness. Our wars are therefore ‘holy’ wars. With all due respect, this is blatant idolatry.”

And on Gerson’s big government conservatism:

[None of this is] to say that social justice isn’t a Christian concern. But Gerson is more stirred by abolitionists and activists like William Wilberforce and Martin Luther King Jr., and the sweeping social change they wrought, than he is by Christ’s own model, which was conspicuously short on political impact and long on individual acts of mercy. He implies that his giants—poverty, AIDS, illiteracy, genocide—are too big for hand-to-hand combat. Thus the Biblical call to “do unto the least of these”—the hallmark of which is personal sacrifice—must be replaced by government programs—the wellspring of which is coercion. If this constitutes an act of worship, it honors a failed god.

Again, worth a read. I haven’t seen Gerson get a favorable reading anywhere this side of the Ethics and Public Policy Center.